Finance review: 05/02/08

February 5, 2008

Overview: Equities tumble as ISM fuels recession fears

US and European stock markets tumbled and government bonds surged on Tuesday as further evidence of economic slowdown emerged on both sides of the Atlantic.

The chief surprise of the day came from the US Institute for Supply Management's non-manufacturing business activity index, which fell to 41.9 per cent in January from 54.4 per cent, the biggest ever monthly decline and its lowest level since October 2001.

It was the first time the index has come in below the 50 level, signifying contraction, since March 2003. "The survey results were downright disastrous," said Stephen Stanley, chief US economist at RBS Greenwich Capital. "These are recessionary readings."

As Wall Street accelerated losses in afternoon trade, credit spreads widened sharply, maintaining support for government bonds. The dollar remained firmer as oil and gold lost ground.

"Stocks were crushed by the ISM weakness, and credit markets also performed poorly," said Ted Wieseman, economist at Morgan Stanley.

Lena Komileva, G7 economist at Tullett Prebon, said the report reinforced the notion that the Federal Reserve had been unable to forestall a recession in spite of aggressive, timely policy easing.

"Fed rate cuts are not the answer to this credit crunch and hence cannot prevent the loss of confidence in the real economy," she said.

Some analysts warned that the ISM report was well out of line with other January indicators. "The ISM indices have only deteriorated this rapidly following a massive shock, such as the 9/11 attacks," said Julian Jessop, at Capital Economics.

"But it may well be significant that after such sharp falls in the past they have typically rebounded in the following month."

US interest rate futures moved to fully price in another half-point cut in US interest rates when the Fed next meets, on March 18.

"We think that the Fed will ease by 50 basis points in March and in April and by another 25bp in June," reducing the Fed funds rate to 1.75 per cent by mid-year said Mr Stanley.

Disappointing services sector and retail sales data in the eurozone prompted similar slowdown fears and raised speculation that the European Central Bank would be forced to soften its hawkish stance on interest rates.

The purchasing managers' services index fell from 52.0 in December to 50.6 in January for the whole of the zone, and dipped below the break-even 50 level in Germany, Italy and Spain. Eurozone retail sales fell 0.1 per cent in December, and were down 2 per cent year on year.

"The sharp deceleration in eurozone services growth coupled with the lacklustre retail sales data suggest market expectations of ECB rate cuts later this year may be more than just wishful thinking," said Martin van Vliet, economist at ING.

The UK's service sector held up better last month, with the business activity index edging up to 52.5 from 52.4.

Analysts said the figures helped reinforce the view that the Bank of England would cut interest rates by 25 basis points to 5.25 per cent tomorrow, rather than by a more aggressive 50bp.

The equity market response to the day's economic news was unequivocal and stocks in New York closed at their lows of the day. Financials led the selling and late in the day Fitch Ratings placed some bond insurers on ratings watch negative.

The S&P 500 fell 3.2 per cent, its worst day in nearly a year and it is down 9 per cent in 2008, its poorest start to a year ever.

The pan-European FTSE Eurofirst 300 index tumbled 3.1 per cent and the FTSE 100 in London shed 2.6 per cent.

Asian markets had staged a broad retreat as investors took profits after the previous session's strong gains and closed positions ahead of the Lunar New Year holiday.

In Tokyo, the Nikkei 225 Average fell 0.8 per cent while Hong Kong lost 0.9 per cent. Australian stocks shed 1.3 per cent as retailers were hit by a 25bp rise in domestic interest rates.

European and US credit spreads widened sharply as stock markets declined. The Markit iTraxx Crossover index, a closely-watched barometer of risk appetite in Europe, widened to 504bp from 471bp late on Monday. The Markit CDX index which references US investment-grade bond risk widened to 117bp from 109bp.

The flight out of equities prompted strong safe-haven buying of government bonds. The yield on the 10-year US Treasury was down 8bp at 3.56 per cent while the two-year yield was 14bp lower at 1.92 per cent.

The Treasury yield curve steepened, with the difference between two-, and 10-year note yields moving to 1.64bp. The curve had steepened from just under 100bp since the start of the year as rate cuts and the prospect of more to come has pulled short-dated yields sharply lower.

"There were good further front-end led gains in late trading as stocks continued hitting new lows that steepened the curve significantly further," said Mr Wieseman.

In Europe, the two-year Schatz yield fell 13bp to 3.26 per cent.

On currency markets, the eurozone data weighed on the euro, sending the single currency down 1.2 per cent against the dollar and 1.1 per cent against the yen.

In commodities, March West Texas Intermediate fell $1.61 to $88.41 a barrel, as the day's economic figures sparked fresh concerns about the impact on demand of a global economic slowdown. Gold consolidated below $900 an ounce.

U.S. service sector slows down

NEW YORK - Lingering hopes that the U.S. economy might avert a recession withered Tuesday after the nation's service sector — its banks, travel companies, contractors and stores, among others — shrank for the first time in five years.

It was unwelcome news for many investors, who were beginning to believe that the Federal Reserve might engineer a way out of the worst economic slowdown since 1991. Stocks tumbled, with the Dow Jones industrial average losing 370 points, its biggest point drop since August.

Much of the talk was not about whether there would be a recession, but about how bad it might be.

"The number's so terrible it's almost beyond belief, especially among the optimists," said Scott Anderson, senior economist at Wells Fargo & Co. "I think the writing's on the wall. More and more economists are talking about recession, and whether it'll be a severe or mild one."

The January reading from the Institute of Supply Management "was about as big a shock as you can probably get," said Joel Naroff, chief economist at Commerce Bancorp.

Anderson said he believes January may end up being the official start of a recession. Many businesses already suspect as much.

Moving company Allied Van Lines filed for bankruptcy on Tuesday, saying it had fallen victim to the downturn in the housing market and its own heavy debt load. Charming Shoppes Inc. — which runs the Petite Sophisticate and Lane Bryant clothing stores — said it would cut 200 jobs and close 150 stores.

Stocks of rental car companies plunged Monday after Dollar Thrifty Automotive Group Inc. slashed its 2007 earnings guidance. The company said it sees weak demand in the travel market and soft used-car sales.

Ryan Kaminski, who runs a Mexican restaurant in Sarasota, Fla., said the squeeze he has felt as both a business owner and a consumer since last summer is growing worse. The restaurant's traffic started thinning out last summer, pulling 2007 sales down 10 percent from a year earlier, and so far this year sales are down 15 percent from a year ago.

"I used to be able to find a person from any trade — carpenters, electricians, plumbers — in the restaurant every day," he said. "Since the housing market crashed, it's just dried up. Those type of customers are just gone."

Kaminski, 31, said he and his wife don't spend much anymore either. "We've cut out eating out and we didn't go on vacation last year," he said. "It's getting bad."

In the tourism sector, water park operator Great Wolf Resorts Inc. is seeing a drop in business at its resorts in Traverse City, Mich., and Sandusky, Ohio — two areas where jobs are dependent on the sagging auto industry, said the company's chief executive, John Emery.

Business is up slightly overall for the Madison, Wis.-based operator of 10 resorts. But at the Rust Belt parks, families are cutting their spending by 2 percent to 4 percent. "Those are tough markets for families for right now," Emery said.

Executives surveyed for the service sector report by the Institute for Supply Management fretted over the economy, high oil prices, the falling stock market, lower customer demand, stiffer competition and sluggish sales, said Anthony Nieves, chairman of the trade group's non-manufacturing business survey committee.

The ISM's new composite index measuring the health of the service sector was 44.6 in January, below the level of 50 that indicates expansion. The group's measure of non-manufacturing business activity fell to 41.9 in January from a revised reading of 54.4 in December — its largest drop ever. Economists surveyed by Thomson Financial/IFR had expected a slight slowdown but had still forecast growth, with a median estimate of 53.

The last time the ISM reported that the service sector shrank — that is, registered less than 50 — was March 2003.

"I think it will be tipping plenty of people over the edge" in convincing economists that the U.S. is in a recession, said Nigel Gault, chief U.S. economist at Global Insight.

Gault said that in March 2001, the beginning of the last recession, the index had a break-even reading of 50. And during that recession, the index hung around 48 or 49 — several points higher than January's reading.

"This is an absolute collapse of this index," he said.

Two measures that fell were those for new orders and employment, and that could signal more trouble ahead. New orders fell to 43.5 while employment fell to 43.9. The drop in employment is especially troubling, because the service sector has been the overall economy's engine of job growth for months.

Factories eliminated 28,000 jobs in January and have cut 269,000 jobs over the past 12 months, the government reported last week. The economy as a whole lost 17,000 jobs last month, which was the first nationwide loss of jobs since August 2003.

The financial services industry, part of the wider service economy, has been especially hard hit by falling home prices, mortgage defaults, and the devaluation of mortgage-backed investments.

After writing down their portfolios and putting money in reserve to prepare for further losses, banks, mortgage lenders and brokerages are now strapped for cash and have pared their payrolls to cut costs.

Challenger, Gray & Christmas Inc., a placement consulting firm, said companies announced 69 percent more job cuts in January than in December, and about 21 percent of those were in the financial sector. According to the firm, the financial sector eliminated more than 153,000 jobs in 2007, a record amount.

Platinum reaches record above $1,800

Platinum continued its record-breaking run on Tuesday but oil and base metals fell as fears over a possible US recession were amplified by an unexpectedly sharp fall in January's ISM non-manufacturing survey.

Platinum hit a record $1,809 a troy ounce on continuing concerns about production in South Africa, which accounts for 80 per cent of global supplies, before slipping 1.5 per cent to $1,763 a troy ounce on profit-taking.

Following last week's electricity supply crisis in South Africa, power has been restored to mines but only at 90 per cent of normal requirements. Mining companies have been unable to resume production at full capacity and the outlook for the country's platinum output remains uncertain as power rationing appears likely.

Gold consolidated below $900, easing 1.4 per cent to $891.70 a troy ounce, after reaching a record $936.50 on Friday.

Nymex March West Texas Intermediate crude oil fell $1.35 to $88.67 a barrel while ICE March Brent lost $1.36 at $89.11 a barrel on recession fears.

The latest US weekly inventories data is due for release today and the market appears to be anticipating further evidence of demand softening. US refineries were expected to have reduced consumption for a fourth week with refinery utilisation expected to drop 0.2 percentage points to 84.8 per cent, according to a preliminary poll of analysts by Reuters.

US crude stocks were forecast to rise 2.2m barrels while distillate stocks (including heating oil) were expected to continue their seasonal decline with a fall of 2.1m barrels. Gasoline inventories were expected to rise for a thirteenth week with an increase of 1.9m barrels.

Nymex March heating oil slipped 3.6 cents to $2.4474 a gallon while Nymex March RBOB unleaded gasoline fell 5.2 cents to $2.2603 a gallon.

Trading in base metals was brisk in spite of the start of the new year break in China where producers have suffered upset to production due to severe winter weather and power supply disruptions.

Jiangxi Copper, China's largest producer by volume, said much of its production activities in Jiangxi province had stopped due to recent snowstorms.

In Chile, no impact was reported on the Collahuasi copper mine, which produces 8.2 per cent of the country's copper, after an earthquake struck the north on Monday.

In London, copper fell 2 per cent to $7,115 a tonne.

Citigroup cut its 2008 copper price forecast 12 per cent to $6,790 a tonne but raised its 2009 forecast 16.7 per cent to $7,716 a tonne.

John Hill said there would be contagion effects from the sharp slowdown in the US economy to China at a macro level but there had been no sign of this affecting metal markets so far.

Mr Hill said US metals demand had been weak since mid 2006 but it was now much less important as a consumer, accounting for 12 per cent of global copper demand and 16 per cent for aluminium compared with 20 per cent and 25 per cent respectively eight years ago.

"Especially important for commodity markets is that [Chinese] infrastructure spending is likely to climb, prompting upward revision to forecasts of fixedasset investment growth," he said.

Zinc dropped 3.9 per cent to $2,372.5 a tonne; aluminium lost 1.6 per cent to $2,623.5 a tonne; and nickel eased 1.1 per cent to $26,800 a tonne.

U.S. service sector contracts in January

NEW YORK - For the first time in almost five years, the nation's services sector — including restaurants, travel, banking, construction and retail — contracted in January, stoking rising worries of a recession.

The Institute for Supply Management's report, released Tuesday, shook the stock market while bond prices surged. The Dow Jones industrial average, the Standard & Poor's 500 index and the Nasdaq composite index all fell.

"This is an absolute collapse of this index," said Nigel Gault, chief U.S. economist at Global Insight.

The Institute for Supply Management reported that its new composite index measuring the health of the service sector was 44.6 in January. A reading above 50 indicates expansion, while below 50 indicates contraction. ISM introduced the composite index on Tuesday.

ISM's measure of non-manufacturing business activity fell to 41.9 in January from a revised reading of 54.4 in December. Economists surveyed by Thomson Financial/IFR had expected a slight slowdown but had still forecast growth, with a median estimate for the index of 53.

The consensus among survey respondents was that the services sector, which accounts for about two-thirds of the economy, has "come to the end of a long-term period of growth," said Anthony Nieves, chairman of the Institute for Supply Management's non-manufacturing business survey committee.

Gault said that in March 2001, the beginning of the last recession, the index had a break-even reading of 50 and during that recession, the index hung around 48 or 49 — several points higher than January's reading.

"This is a very bad report," Gault said, in terms of convincing economists that we may be in or headed for recession. "I think it will be tipping plenty of people over the edge."

Price increases have slowed while costs are up, said Nieves, who is also senior vice president for supply management at Hilton Hotels Corp. Survey respondents cited recession fears taking hold, high energy prices, and worries over inflation and the housing market.

"It gives me a dose of reality that this sector, which has been resilient for some time, now it has become susceptible to all the influences in the economy," Nieves said.

ISM said only three service industries reported growth, while 14 showed contraction. The three growing segments — utilities, professional services and educational services — include more crucial needs such as doctor visits. Meanwhile, cutbacks in less-essential spending has dragged down such segments as arts and entertainment, fishing and hunting, and lodging and food services.

Two measures that fell were those for new orders and employment, which Nieves said were more forward-looking — so their drops could indicate trouble ahead. New orders fell to 43.5 while employment fell to 43.9.

"That's not instilling any confidence in me that we're going to see any real strong uplift," he said.

The drop in employment is especially troubling, according to Global Insight, because the service sector has been the overall economy's engine of job growth for months.

That stirs greater fears of falling employment as factories eliminated 28,000 jobs in January and have cut 269,000 jobs over the past 12 months, drops the government reported last week. The economy as a whole lost 17,000 jobs last month, which was the first nationwide loss of jobs since August 2003, during a recovery from the last recession.

Tuesday's report was issued roughly an hour earlier than its usual 10 a.m. release because of what ISM called "a possible breach of information."

A spokeswoman for the trade group said it decided late Monday to release the index early, before U.S. markets opened on Tuesday, because someone who was familiar with the contents had inadvertently made a comment about it on Monday night.

"It was a slip of the tongue," spokeswoman Andrea Waas said. "The person doesn't think the other individual had a clue."

Insight: CDS market may create added risks

In May 2006, Alan Greenspan, the former Federal Reserve chairman, noted: "The credit default swap is probably the most important instrument in finance. ... What CDS did is lay-off all the risk of highly leveraged institutions - and that's what banks are, highly leveraged - on stable American and international institutions."

The reality may prove different.

The CDS is economically similar to credit insurance. The buyer of protection (typically a bank) transfers the risk of default of a borrower (the reference entity) to a protection seller who for a fee indemnifies the protection buyer against credit losses. Current debate has focused on the size of the market. But the key problem is that a combination of documentation and counterparty risks means that the market may not function as participants and regulators hope if actual defaults occur.

CDS documentation, which is highly standardised, generally does not exactly match the terms of the underlying risk being hedged. CDS contracts are also technically complex in relation to the identity of the entity being hedged, the events that are covered and how the CDS contract is to be settled. This means that the hedge may not provide the protection sought.

In case of default, the protection buyer in CDS must deliver a defaulted bond or loan - the deliverable obligation - to the protection seller in return for receiving the face value of the delivered item (known as physical settlement). When Delphi defaulted, for example, the volume of CDS outstanding was $28bn against $5.2bn of bonds and loans. On actively traded names CDS volumes are substantially greater than outstanding debt making it difficult to settle contracts.

Shortage of deliverable items and practical restrictions on settling CDS contracts have forced the use of "protocols" - where any two counterparties, by mutual consent, substitute cash settlement (based on the market price of defaulted bonds) for physical delivery. In Delphi, the protocol resulted in a settlement price of 63.38 per cent (the market estimate of recovery by the lender). The protection buyer received 36.62 per cent (100 per cent - 63.38 per cent) or $3.662m per $10m CDS contract. Fitch Ratings assigned a recovery rating to Delphi's senior unsecured obligation equating to a 0-10 per cent recovery band - far below the price established through the protocol. The buyer of protection may have potentially received a payment on its hedge below its actual losses - effectively it would not have been fully hedged.

CDS contracts substitute the risk of the protection seller for the risk of the loan or bond being hedged. Some 60-70 per cent of ultimate CDS protection sellers are financial guarantors (monoline insurers) and hedge funds. Concerns about the credit standing of monolines are well documented. Recently, Merrill Lynch took a charge of $3.1bn against counterparty risk on hedges with financial guarantors.

In the case of hedge funds, the CDS is marked to market daily. Any gain or loss is covered by collateral (cash or high quality securities) to minimise performance risk. If there is a failure to meet a margin call then the position must be closed out and the collateral applied against the loss. As the case of ACA highlighted, banks may not be willing or able to close out positions where collateral isn't posted. Collateral models also use historical volatility and correlation that may underestimate the risk.

Then there are operational risks - mark to market of the CDS and control of collateral.

If the CDS contracts fail then "hedged" banks are exposed to losses on the underlying credit risk. The CDS market entails complex chains of risk - similar to the re-insurance chains that proved so problematic in the case of Lloyd's of London. A default may quickly cause the financial system to become gridlocked as uncertainty about counterparty risks restricts trading.

As the credit crisis deepens, the risk of actual defaults becomes real. The CDS market will be tested and may be found wanting.

CDS contracts may not actually improve the overall stability and security of the financial system but actually create additional risks.

The writer is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives

Services index plummets, points to recession

NEW YORK (Reuters) - The U.S. services sector retrenched sharply in January to levels not seen since the 2001 recession, renewing fears about an economic slump, according to a survey released on Tuesday.

The Institute for Supply Management's index of non-manufacturing plummeted to 41.9 from 54.4 in December, its largest monthly decline on record and a far greater drop than Wall Street expected. A Reuters poll of economists had produced a median expectation of a slip to 53.0

"The recession has indeed arrived," said Jane Caron, chief economic strategist at Dwight Asset Management in Burlington, Vermont.

A reading below 50 indicates contraction, and bond prices jumped as the figures reinforced investors' conviction that the U.S. economy is already in recession. Stocks sold off.

The employment index fell to 43.9 from 51.8, corroborating last week's dire U.S. payrolls report, which showed the first net monthly contraction in the labor market in more than four years.

Weakness was evident across the board. A measure of new orders fell to 43.5 from 53.9.

"It's another recession marker on the radar screen," said Cary Leahy, economist at Decision Economics in New York.

Analysts said the gloom surrounding the services report justified the Federal Reserve's recent steep interest rate cuts. The Fed slashed rates by 1.25 percentage points in the past two weeks, a rare strong dose of stimulus over such a short period.

A downturn that began in the U.S. housing sector about two years ago has spread to banks, which made many loans to sketchy borrowers and are now grappling with rising mortgage defaults.

Lately, it is the consumer that appears to be throwing in the towel. Still, weekly chain store sales did paint a mixed picture in the latest week, with Redbook Research reporting a 0.4 percent decline, but the International Council of Shopping Centers registering a 1.7 percent rebound.

Wall Street skids about 3 percent on recession sign

NEW YORK (Reuters) - Stocks suffered their biggest drop in nearly a year on Tuesday after data showed the worst monthly contraction in the services sector since the last U.S. recession and Standard & Poor's warned it could cut bank credit ratings.

The Dow and S&P 500 had their biggest drops since February 27, 2007. All 30 Dow stocks fell and only 17 of the 500 components on the S&P closed higher.

Recession fears slammed sectors across the board, ranging from telecommunications to energy. Banks and other financial services stocks fell particularly hard after S&P said any loss of a top credit rating by a major bond insurer could force banks to put hobbled bonds back on their balance sheets, curtailing funds available for basic lending.

"This could lead to a further prolonged period of generalized market disruption and a loss of confidence that would not be favorable for any financial institution," the rating agency said.

The tone for the day was set by the January reading of the Institute for Supply Management's non-manufacturing index. The gauge had its biggest drop since the indicator was created in 1997 and fell to the lowest level since October 2001, aggravating fears that a recession is at hand.

"The U.S is no longer a manufacturing economy, it's a service economy, so this number will carry a lot more weight" than last week's surprise rise in ISM's manufacturing index, said Paul Nolte, director of investments at Hinsdale Associates, in Hinsdale, Illinois. He added that the ISM report will make investors more nervous about other upcoming indicators.

The Dow Jones industrial average (.DJI) was down 370.03 points, or 2.93 percent, at 12,265.13. The Standard & Poor's 500 Index (.SPX) was down 44.18 points, or 3.20 percent, at 1,336.64. The Nasdaq Composite Index (.IXIC) was down 73.28 points, or 3.08 percent, at 2,309.57.

Year-to-date, the Dow is down 7.5 percent while the S&P is 9 percent lower. The Nasdaq has fared worse, dropping 12.9 percent so far in 2008.

Stocks took a last-minute leg lower after rating agency Fitch said it may cut the AAA-rating on MBIA Inc (MBI.N), the world's biggest bond insurer.

Insurer American International Group Inc (AIG.N) was one of the worst Dow performers, falling 4.5 percent to $52.93 on fears about credit exposure.

Investment bank Goldman Sachs & Co (GS.N) slid 5.5 percent to $189.86 after a broker downgrade. Citigroup Inc (C.N) shares dropped 7.4 percent to $27.05.

Oil companies such as Exxon Mobil Corp (XOM.N) were under pressure on expectations that an economic downturn will slow transportation and manufacturing, crimping demand for energy.

Exxon was down 3.9 percent at $82.11, making it the top-weighted drag on the S&P.

Technology shares, seen as particularly vulnerable to a downturn in both business and consumer spending, were under pressure.

Shares of business software maker Oracle Corp (ORCL.O) fell 4.7 percent to $19.25, while BlackBerry device maker Research In Motion Ltd's stock (RIM.TO)(RIMM.O) fell 5.2 percent to $88.30.

Verizon shares fell 4.6 percent to $36.83 while stock of rival AT&T Inc (T.N) dropped 3.8 percent to $36.73 on the NYSE.

Toyota net up 7.5 pct on emerging market growth

TOKYO (Reuters) - Toyota Motor Corp (7203.T) reported a 7.5 percent rise in quarterly profit on Tuesday thanks to speedy growth in China, Russia and other emerging markets.

Toyota, valued at $196 billion -- about 12 times the market capitalization of General Motors Corp (GM.N) -- has seen its momentum slow in the key U.S. market, but has made up for that with rapid expansion in China, Russia, the Middle East and other oil-rich regions.

That has helped Toyota and domestic rivals Honda Motor Co (7267.T) and Nissan Motor Co (7201.T) shield themselves from a downturn in the United States -- the source of much of their profits -- which has been dogged by falling housing prices and credit woes.

October-December net profit at Toyota, the world's most profitable automaker, was 458.7 billion yen, ahead of an average estimate of 455.4 billion yen from six brokerages surveyed by Reuters Estimates.

Third-quarter operating profit, which excludes earnings made by its Chinese joint ventures, grew 4.7 percent to 601.6 billion yen. Revenue grew 9.2 percent to 6.7 trillion yen.

For the full year ending on March 31, Toyota kept its forecasts unchanged for a net profit of 1.7 trillion yen and operating profit of 2.3 trillion yen -- record results for the seventh straight year.

"The company is taking a cautious view due to two main reasons: the possibility of the U.S. economy falling into a recession, which will hurt consumption, and the stronger yen," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management.

Consensus forecasts from 22 brokerages call for a net profit of 1.82 trillion yen and operating profit of 2.46 trillion yen.

The auto maker announced share buybacks worth up to 120 billion yen and plans to cancel 4.49 percent of outstanding stock.

Analysts expect Toyota's steady profit growth to continue despite pressure from a weaker dollar and risks of a U.S. economic slowdown, powered by fuel-efficient Prius cars and high-margin Lexus models.

Toyota opened a new factory in Russia late last year, and is also adding capacity in Thailand, Brazil, China and Canada.

Global sales for the third quarter rose 5.3 percent to 2.3 million vehicles thanks to a growth in all markets except North America. Sales in Japan were flat.

As proof of Toyota's success in spreading out its regional portfolio, an executive said North America now accounted for 44 percent of the automaker's total operating profit for the first three quarters, down from 57 percent a year earlier.

"You can see that our regional balance is improving," Senior Managing Director Takeshi Suzuki told a news conference.

For the full business year, Toyota kept its global vehicle sales forecast unchanged at 8.93 million vehicles, but adjusted the projections by region.

In North America, it lowered its forecast by 20,000 units to 2.97 million. It also cut its projections for the mature Japanese and European markets, while raising the figures for Asia and other regions.

The company is also aiming to speed up cost cuts by working with suppliers to design vehicle components and systems more efficiently under its "Value Innovation" project -- fruits of which will first appear in a remodeled Crown sedan this month.

Honda and Nissan both reported a double-digit rise in profits last week, with sales advancing in most markets.

Nevertheless, share prices of Japan's top three automakers have plunged over the past year as investors shunned companies with a big exposure to the United States.

Toyota is the world's biggest carmaker by sales, having overtaken GM in 2006. GM, which includes in its tally cars built by a minority-held Chinese joint venture, says it still holds the top spot by a few thousand vehicles.

Toyota has forecast a slight rise in its U.S. sales this calendar year with new models such as the Corolla sedan due for launch, although it anticipates softer overall demand. Toyota's U.S. sales fell 2.3 percent in January from the year before.

Shares of Toyota lost 25 percent in the year to Monday, leading a 23 percent fall in Tokyo's transport sub-index (.ITEQP.T) over the same period. Honda shed 24 percent and Nissan dropped 28 percent.

Prior to the earnings announcement, Toyota shares ended down 2 percent on Tuesday, in line with the subindex.

Boston Scientific 4Q posts $458M loss

BOSTON - Costs from Boston Scientific Corp.'s $27 billion acquisition of Guidant Corp. nearly two years ago continue to erode the medical device maker's bottom line.

Boston Scientific swung to a $458 million fourth-quarter loss, as short-term costs from steps to reduce acquisition-related debt and cut jobs obscured an overall sales gain.

The Natick-based company said Monday that its net loss for the October-December period equaled 31 cents per share. In the same quarter a year earlier, Boston Scientific posted a profit of $277 million, or 19 cents per share.

Boston Scientific's sales rose 4 percent to $2.15 billion from $2.07 billion in the year-ago quarter, narrowly beating the consensus estimate of analysts surveyed by Thomson Financial, who expected sales of $2.13 billion in the latest quarter.

Excluding a total $939 million in charges, Boston Scientific posted a profit of $355 million, or 24 cents per share.

The biggest of the charges was a $365 million hit from estimated potential losses due to patent litigation involving stents, which help prop heart arteries open after surgery.

Boston Scientific also recorded charges of $208 million tied to businesses that the company recently sold and that are no longer worth as much they once were; $184 million in restructuring charges from the company's October announcement of plans to cut 2,300 jobs, or 8 percent of its work force; $174 million in amortization expense; and $8 million of additional acquisition-related charges.

Some of the recent asset sales that triggered the quarterly loss were part of a plan by Boston Scientific to reduce the hefty debt load the company was saddled with after the Guidant deal. The job cuts were part of a plan to cut operations costs by about $500 million this year.

"I don't think any of these charges was really surprising," said Jan Wald, a Stanford Group Co. analyst. "Cost-cutting hurts, but it is something the company had to do."

The total $939 million in charges from the latest quarter is up from $435 million in charges that Boston Scientific reported in last year's third quarter related to acquisitions and asset sales.

Sales of Boston Scientific's drug-coated stents totaled about $435 million in the fourth quarter, down 14 percent from $506 million in the year-ago quarter. Stent sales at Boston Scientific and a rival, Johnson & Johnson, have been hurt by research questioning the devices' safety and effectiveness, although some more recent studies have called some of the findings into question.

Sales of defibrillators and pacemakers, which Boston Scientific acquired in the Guidant deal, rose to $544 million from $489 million a year ago.

Wald said Boston Scientific didn't appear to lose a large share of the drug-coated stent market despite competition from new stents in Europe. And Boston Scientific's sales of cardiac rhythm devices did a little better than Wald projected.

"It sort of evened out," said Wald, who called Boston Scientific's quarter "positive."

The company said it expects to post first-quarter sales in a range of $1.96 billion to $2.08 billion — just below analysts' forecast for $2.09 billion. Boston Scientific expects a per-share profit of 15 cents to 20 cents, excluding one-time charges — above analysts' estimate of 12 cents a share.

Boston Scientific announced fourth-quarter and full-year results after its shares rose 48 cents, or nearly 4 percent, to $12.85 in regular trading. In after-hours trading, the stock tacked on 45 cents, for a gain of 3.6 percent, to $13.30.

The stock is trading above a five-year low of $10.76 set on Jan. 9 but is still worth only about half as much as it was before the Guidant deal in April 2006.

The company planned to discuss the fourth-quarter results in detail during a conference call with analysts Tuesday.

Yum Brands earnings flat; Wendy's up

LOUISVILLE, Ky. - Fast-food rivals Yum Brands Inc. and Wendy's International Inc. could savor portions of their end-of-the-year financial reports.

For Yum, robust overseas sales made up for a lackluster U.S. performance.

Ohio-based Wendy's said its fourth-quarter earnings more than quadrupled from a year ago, when it took major charges for discontinued operations. But the chain fell just short of Wall Street's per-share expectations and warned of a tough stretch early this year.

"We expect a challenging first quarter of the year due to consumers' nervousness about the economy and the current slowdown in restaurant spending," Wendy's chief financial officer, Jay Fitzsimmons, said Monday. "In addition, we continue to see commodity price increases in 2008, which we plan to offset with menu price increases and further cost reductions."

The chain said it made $14.1 million, or 16 cents per share, for the quarter ended Dec. 30, compared with $3 million, or 3 cents a share, for the year-ago period when it recorded charges from the spinoff of the Tim Hortons chain and the sale of Baja Fresh Mexican Grill.

Discounting one-time charges including $6.5 million used to fund a committee studying options for the company, including a possible sale, Wendy's would have made 21 cents a share.

Sales fell slightly in the quarter to $596 million from $596.4 million a year ago.

Louisville-based Yum Brands, which operates the Taco Bell, Pizza Hut and KFC chains, reported essentially flat fourth-quarter earnings as robust sales in its China and international divisions countered rising costs and a sluggish U.S. performance.

Yum raised its 2008 earnings forecast to $1.85 per share from $1.82. The estimate doesn't include one-time gains from the sale of its minority interest in KFC Japan and from global refranchising.

The company had a record-setting year of restaurant openings overseas, and said it achieved at least 10 percent annual earnings per share growth for the sixth straight year.

Yum Chairman and Chief Executive David C. Novak predicted another year of double-digit earnings-per-share growth led by strong overseas sales and 5 percent U.S. operating profit growth. "Our teams, strategies and financial strength have never been better," he said.

Lackluster domestic sales remained a problem for Yum in 2007. U.S. operating profit for the year slipped 3 percent to $739 million

Larry Miller, a restaurant analyst with RBC Capital Markets, foresees a bumpy stretch for the fast-food sector amid the U.S. economic slowdown.

"I think you're going to see these guys have decelerating sales, with somewhat high costs," he said. "But they do have the franchise business model, which gives them a little bit of protection in terms of cash flow and earnings."

Citi Investment Research restaurant analyst Glen Petraglia, in a note to investors after Wendy's reported its earnings, mentioned broader problems for the industry — "commodity prices are rising, the consumer has weakened" — as well as headaches specific to Wendy's.

"Wendy's continues to search for the appropriate advertising tone," he said.

For Yum, net income for the three months ended Dec. 29 slipped to $231 million from $232 million a year earlier. Earnings per share of 44 cents climbed from 42 cents in the year-ago period, as the results were based on 28 million fewer shares outstanding.

Analysts surveyed by Thomson Financial expected earnings of 42 cents per share.

Revenue rose 8 percent to $3.26 billion for the quarter.

The company said fourth-quarter costs rose 9 percent to $2.93 billion.

Worldwide same-store sales, or sales at stores open at least a year, grew 4 percent for the quarter. Yum's burgeoning China division once again set a torrid sales pace.

Fourth-quarter operating profit totaled $99 million in the division that includes China, Thailand and Taiwan, up 44 percent from a year ago. Quarterly revenue grew 39 percent.

The company opened a record 852 new restaurants last year in the international division, which had an 18 percent increase in operating profit for the year.

In the United States, fourth-quarter operating profit slipped 1 percent to $196 million. For the year, operating profit was off 3 percent at $739 million.

McDonald's said recently its December sales were flat at U.S. restaurants open more than a year, followed by January U.S. sales roughly 1.5 percent above a year ago. The company blamed winter storms but also acknowledged "softer consumer spending."

Burger King Holdings Inc. recently reported a 29 percent surge in second-quarter profit, and its chief executive said he expects the company to exceed its previous guidance of 12 percent to 15 percent earnings-per-share growth this fiscal year.

But Miller said any thought of the fast-food industry being resistant to an economic slowdown is a misnomer.

"When you lose your job, are you eating at fast food or casual dining? You're not eating anywhere. It's not that they're trading down, they're just not eating out with the same frequency," Miller said.

Yum profit beats street but shares down on outlook

LOS ANGELES (Reuters) - Yum Brands Inc (YUM.N), operator of the KFC, Taco Bell and Pizza Hut chains, beat Wall Street's quarterly profit target on Monday, but forecast 2008 earnings below analysts' expectations and shares fell 2.3 percent.

An economic downturn in the United States has prompted people to spend less at restaurants and investors are jittery about the growth potential of budget-oriented, fast-food purveyors, who are seeing food and labor costs rise.

Sales at established U.S. stores rose only 1 percent in the quarter, compared with 17 percent in mainland China and 5 percent internationally.

Yum said in a statement it was raising its full- year forecast for 2008 earnings to $1.85 per share from $1.82 per share, principally due to growth in China. The company said its forecast excludes one-time items that would increase per-share earnings by 6 cents to $1.91.

Fourteen analysts polled by Reuters Estimates had 2008 targets for earnings excluding items that ranged from $1.82 to $1.91 per share. The resulting average was for full-year earnings of $1.86 per share, excluding items.

A Yum spokeswoman said she believed that some analysts' models included the one-time items excluded from the company's forecast.

RBC Capital Markets analyst Larry Miller said a lower tax rate boosted Yum's net income by 5 cents during recent fourth quarter.

He also said the company's 2008 outlook was weighing down shares.

"Certainly that's not helping," Miller added.

Net income at Louisville, Kentucky-based Yum was $231 million, or 44 cents per share, beating Wall Street's average call for per share earnings of 42 cents, according to Reuters Estimates.

The result compared with Yum's year-earlier quarterly net income of $232 million, or 42 cents per share.

Share buybacks reduced dilution in the most recent quarter, raising Yum's earnings per share results. Yum said it plans to return more than $2 billion to shareholders through dividends and share buybacks in 2008.

Yum's fourth-quarter revenue rose 8 percent to $3.26 billion, topping analyst's average call for sales of $3.16 billion.

The shares of the company, which has more than 35,000 restaurants worldwide, were up 20 percent from a year ago on a split-adjusted basis.

The stock fell to $35 in after-hours trading from its New York Stock Exchange close of $35.81.

News Corp lifts outlook, sees no ad slowdown

NEW YORK (Reuters) - Rupert Murdoch's News Corp (NWSa.N) nudged up its full-year outlook on Monday and said it has not seen any weakness in the television advertising market, after posting a moderate rise in quarterly profit.

News Corp, which owns Fox News and the Fox television network in the United States, forecast its fiscal 2008 operating income would grow in the mid-teens percentage range, above its previous estimate in the low teens.

"Now I know there are concerns about the health of the ad market. But we here at Fox have not seen any weakness to date. Pricing remains very strong for both entertainment and sports," News Corp Chief Operating Officer Peter Chernin said on a conference call with analysts.

Fears of an economic recession and a three-month-old strike by Hollywood screenwriters, which has crippled TV production, have raised concerns about advertising spending in the United States this year.

But unlike rival TV network NBC Universal, owned by General Electric Co (GE.N), which said it was considering cancelling its May upfront advertising presentations to introduce new prime-time TV shows to marketers, Fox said it will hold them.

Fox reaped about $250 million in TV network ad revenue from Sunday night's broadcast of the Super Bowl, making it "the biggest day in the company's history," Murdoch told analysts on a conference call.

News Corp said net profit in its fiscal second quarter ended December 31 rose to $832 million, or 27 cents per share, from $822 million, or 26 cents per share, a year earlier.

While profit per share missed Wall Street expectations by 1 cent, News Corp's revenue growth of 9.5 percent to $8.6 billion beat analysts' average forecast of $8.3 billion, according to Reuters Estimates.

The results were driven by higher advertising sales at the Fox News channel and the Fox television network, which offset a decline in its movie studio business.

A one-time write-down of BSkyB's (BSY.L) investment in ITV also dragged affiliate earnings by $299 million.

Excluding the write-down, Pali Research analyst Richard Greenfield said, News Corp did "significantly better than expected" on an operating basis.

Operating income at the New York-based media conglomerate, which closed a $5.6 billion deal to buy The Wall Street Journal publisher Dow Jones & Co Inc in December, jumped 23 percent to a record $1.4 billion, boosted by double-digit percentage gains in nearly all of its operating businesses.

News Corp said operating profit at its cable networks, which also includes its regional sports networks and international channels, rose 23 percent to $337 million.

Movie studio profit fell 14 percent from the absorption of costs to release box office hits "Alvin and the Chipmunks" and the "timing and delivery" of shows from its TV production studio.

Television profits more than doubled to $245 million, boosted by the Fox network and Star, primarily in India, offsetting a decline from its TV stations.

Fox Interactive Media helped boost operating income in News Corp's "other" segment to $23 million, a $22 million improvement.

The company said the division's profit growth was driven by higher search revenue from its Google Inc (GOOG.O) agreement. It said it was confident Fox Interactive Media, which owns the online teen hangout MySpace, will meet its $1 billion revenue target.

NO DEALS IN SIGHT

Murdoch said the company had no interest in bidding for Yahoo Inc (YHOO.O) or Time Warner Inc's (TWX.N) AOL, if it is up for sale, highlighting that the company prefers going after start-ups rather than established companies.

Microsoft Corp (MSFT.O) offered last Friday to buy Yahoo for about $45 billion, stoking speculation that other companies would attempt to counter-bid. Yahoo is also mulling an alliance with Google, one source familiar with the matter said earlier.

"We're not interested in bidding," Murdoch told reporters on a conference call, answering a question about Yahoo.

Regarding any other deals, he said, "We're not considering anything of significance at this moment."

News Corp was widely expected to make the Web site of the Wall Street Journal freely available to Web viewers, but in January said it would give away parts of the site for free.

Murdoch's company also snapped up a stake in German pay-television broadcaster Premiere in January, putting the company in play as a takeover candidate, analysts said.

News Corp shares were unchanged in extended trading.

CORRECTION: News Corp lifts outlook, sees no ad slowdown

NEW YORK (Reuters) - Rupert Murdoch's News Corp (NWSa.N) nudged up its full-year outlook on Monday and said it has not seen any weakness in the television advertising market, after posting a moderate rise in quarterly profit.

But unlike rival TV network NBC Universal, owned by General Electric Co (GE.N), which said it was considering canceling its May upfront advertising presentations to introduce new prime-time TV shows to marketers, Fox said it will hold them.