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.

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 canceling 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.

Sohu quarterly net climbs on games

SHANGHAI/SAN FRANCISCO (Reuters) - Chinese media company Sohu.com Inc on Monday said quarterly profits rose 148 percent, fueled by record growth in advertising and online gaming in one of the world's biggest Internet markets.

Sohu, which means "search fox" in Chinese, reported fourth-quarter net income rose to $15.1 million, or 39 cents per diluted share, from $6.1 million, or 16 cents per diluted share, in the year-earlier quarter.

Excluding stock option expenses, the company reported a profit of $17.0 million or 43 cents per diluted share.

Analysts had expected a net profit and a profit excluding one-time items, on average, of 31 cents per share, according to Reuters Estimates.

Profit margin rose to 71 percent from 67 percent in the third quarter and 63 percent in the same quarter of 2006.

Revenue at the Beijing-based company grew 90 percent to $65.3 million, exceeding analysts' average forecast of $56.5 million, according to Reuters Estimates. Forecasts ranged from $54.4 million to $58.0 million.

In December, the company raised its fourth-quarter outlook to between $55.5 million and $57.5 million, an increase of $2 million over the previous range, saying demand for its Tian Long Ba Bu online game was better than expected.

Analysts say Sohu's growth is being driven by healthy advertising sales in the run-up to the Beijing Olympics this year, as well as robust gaming revenues from its popular game Tian Long Ba Bu, translated as Sky Dragon Eight Factions.

Sohu said it expected first-quarter revenue of between $66.5 million to $68.5 million. Analysts predicted revenue, on average of $59.9 million, according to Reuters Estimates. Forecasts varied from $56.9 million to $62.0 million.

Advertising revenue is expected to reach $33.5 million to $34.5 million and non-advertising revenue, mostly from gaming should rise to $33 million to $34 million, the company said.

Excluding one-time items, the company said it expected first-quarter earnings per share of between 43 cents and 45 cents. On the same basis, analysts were looking for a profit of 34 cents per share, according to Reuters Estimates.

Stock-based compensation is expected to reduce net earnings per share by 8 cents to 9 cents, the company forecast.

China had 210 million Internet users at the end of 2007, second only to the United States. China is expected to become the world's largest Internet market in terms of users early in 2008, the official Xinhua news agency reported, citing industry sources.

($1=7.182 Yuan)

IBD's Top 10 - Monday

Q4 Profits Strong, Ex Financials

1 Corporate earnings are on track to dive 20.7% vs. a year earlier, the worst decline since the '01 recession. Financials, hard hit by subprime write-downs, will report a net loss. But S&P 500 profits ex banks should rise 11%. Tech earnings are set to soar 26%, with several other sectors doing well. Guidance overall has been solid. But investors and analysts remain wary.

Stocks Close Near Session Lows

2 The Nasdaq fell 1.3%, as big-cap techs Google (NasdaqGS:GOOG - News) and Cisco (NasdaqGS:CSCO - News) sold off. The S&P 500 lost 1% and the Dow 0.8%. Home builders, financials and retailers that ran up last week were among Mon.'s big losers. But volume declined on both exchanges. And the ratio of stocks hitting new highs vs. new lows improved. The 10-year Treasury yield rose 6 ticks to 3.64%.

Obama Within Striking Distance

3 While GOP front-runner John McCain hopes Super Tuesday delivers a knockout blow to Mitt Romney, the race among Dems was too close to call as nat'l polls showed Barack Obama erasing a double-digit deficit with Hillary Clinton. About half of both parties' delegates will be awarded Tue., with 24 states holding primaries and caucuses. Related story on this page

Microsoft Defends Yahoo Deal

4 Buying the Net icon would spur competition by creating a strong No. 2 vs. No. 1 search giant Google , said CEO Steve Ballmer. Google says the deal would give Microsoft (NasdaqGS:MSFT - News) too much control over the Internet. Google also reportedly offered to help Yahoo (NasdaqGS:YHOO - News) repel Microsoft, including a revenue guarantee and ad partnership. Google shares fell 4% and Microsoft 1%. Yahoo rose 1%.

Bush Offers $3.1 Tril Budget Plan

5 The president said it would keep the economy growing and protect U.S. security. Bush said his "good, solid budget" would boost money for education, health and housing and make the tax code fairer. It projects $196 bil in savings over 5 years in Medicare and Medicaid, but still foresees deficits of over $400 bil the next 2 years. Dems declared his budget a non-starter.

SocGen Probes Extend Into U.S.

6 The SEC is looking into Societe Generale board member Robert Day's stock sales before France's No. 2 bank reported a record $7.25 bil trading loss. It's also probing stock sales by 2 foundations tied to the American investor. Brooklyn's U.S. attorney also has begun an unspecified probe related to the loss, which SocGen blames on a rogue trader.

Banks Tighten Lending Standards

7 As credit woes continue, more banks are raising the bar on loans; 55% of U.S. banks tightened standards vs. 40% in Oct. Many lifted standards on prime and subprime mortgages; 80% raised loan standards for commercial real estate, seen as a possible trouble spot in '08. Consumer and business demand for loans fell sharply.

Ethanol Prices Hurt ADM Profit

8 The ethanol producer and food processor's Q2 EPS rose 9% to 73 cents, missing views by a penny. Sales climbed 50% to $16.5 bil, beating views. Lower ethanol prices and higher corn costs hurt Archer Daniels Midland (NYSE:ADM - News). But demand for seed oil and protein meal helped. ADM also cited gains in its malt and wheat processing units. Shares fell 3%.

Humana Tops On Lower Tax Rate

9 The HMO earned $1.43 a share in Q4, up 55% from a year earlier and beating views by 11 cents. It cited a lower-than-expected rate. Revenue increased 12% to $6.34 bil. Humana's (NYSE:HUM - News) enrollment in its full-service Medicare Advantage plans rose 14% to 1.14 mil. The medical cost ratio was good. Humana raised its 08 EPS outlook to $5.35-$5.55 vs. views of $5.46. But its shares fell 3.5%.

Dec. Factory Orders Rose 2.3%

10 That was roughly in line with Wall St. forecasts, while Nov.'s gain was revised up to 1.7%. Dec. durable goods orders were revised down to 5% from last week's initial reading of 5.2%. Nondefense capital goods ex aircraft jumped 4.5%. Unfilled orders, a sign of future demand, rose 2.5%. But shipments fell 0.3% in Dec.

Q4 Earnings Really Weren't Too Bad -- Except For Banking

Corporate profits can be boom or bust. Right now they're both.

With 58% of the S&P 500 reporting results as of Monday morning, fourth-quarter earnings are on track to dive 20.7% from a year earlier, according to Thomson Financial. It would be the worst showing since the fourth quarter of 2001.

But that's mainly due to massive write-downs and other losses by banks. When all results are in, the sector will likely show a net loss.

"It's awful when you aggregate everything. But strip out financials, it's phenomenal," said David Dropsey, senior research analyst at Thomson Financial.

S&P 500 earnings excluding financials look set for an 11% gain.

In the third quarter, overall profits fell 4.5%. But excluding financials, they rose 3%.

The tech sector helped pull up fourth-quarter results. S&P 500 tech firms will likely end up with 26% profit growth, the best in more than three years.

Energy firms and medicals are also on track for solid double-digit gains. Yet stocks are doing terrible. The tech-heavy Nasdaq is down 10.2% so far this year.

Many economists expect a recession this year, even with the Federal Reserve slashing rates.

High-profile warnings haven't helped. Amazon (NasdaqGS:AMZN - News) and Yahoo (NasdaqGS:YHOO - News) have both guided 2008 forecasts lower. Apple (NasdaqGS:AAPL - News) once again gave a conservative outlook, perhaps too cautious for jittery investors.

Even so, warnings on the whole have been mild. The negative-to-positive ratio for first-quarter tech pre-announcements is 1.7 so far -- below the 2.0 average. Overall warnings also aren't alarming.

But strong results have "not translated into upward earnings revisions," said Dirk van Dijk, director of research at Zacks Investment Research. "I view that as an ominous sign, a resounding vote of no confidence from analysts."

Broader economic concerns are playing a role, van Dijk says.

The U.S. barely grew in the fourth quarter and shed jobs for the first time since 2003 last month.

Nearly half of S&P 500 firms' sales come from overseas, so many companies have been able to offset sluggish domestic results so far.

"It's a battle between how bad the U.S. economy is going to be and how strong the world economy will be," Dropsey said.

Looking forward, S&P 500 profits are expected to show tepid gains in the first half of 2008, followed by huge gains in the second half on hopes for a recovery among financials. Techs should enjoy double-digit growth all year.

Fox gives lift to News Corp. earnings

NEW YORK - Improved results from the Fox broadcast network and Fox News Channel lifted second-quarter earnings at News Corp., outweighing lighter returns from movies and TV production, the media conglomerate reported Monday.

News Corp., which bought Wall Street Journal publisher Dow Jones & Co. in December, earned $832 million in the final three months of 2007, up 1 percent from the $822 million it earned in the same period a year earlier.

News Corp.'s chief executive, Rupert Murdoch, told analysts and reporters on a conference call that the company was "definitely not" going to make a bid for Yahoo Inc. Last week Microsoft Corp. made an unsolicited bid for Yahoo that is now worth $41 billion, a rich price that others would have trouble matching.

Asked if News Corp. might be interested in acquiring AOL, another troubled Internet pioneer, should its parent company Time Warner Inc. decide to put it up for sale, Murdoch was even more emphatic: "That's an even easier question. No."

Murdoch said his team was focusing on building up Dow Jones' online properties and planned to make more material available for free on WSJ.com.

But he also said that much of the Journal's core business news coverage would remain behind a subscription wall. Murdoch had pondered opening up the site, which currently has about 1 million paying subscribers, but said in late January the pay wall would remain.

News Corp.'s profits for its second fiscal quarter were equivalent to 27 cents per Class A share, in line with estimates of analysts surveyed by Thomson Financial. Revenue rose 10 percent to $8.59 billion from $7.84 billion a year earlier.

Operating income from broadcast television more than doubled to $245 million from $112 million a year ago on improved ratings and ad pricing at the Fox network. At the same time, Fox's costs declined because of reduced coverage of Major League Baseball's postseason.

Earnings from cable networks rose 23 percent on higher earnings from Fox News Channel, which raised the rates it charges cable companies. Costs from the launch of a new business-themed cable channel partly offset those gains.

Profit from movie and TV production fell 14 percent to $403 million. The company provided relatively little detail about the decline, but said that TV production was less profitable due partly to the timing of new TV episodes.

Earnings from newspapers rose 15 percent to $196 million on advertising revenue growth, largely in Australia. Dow Jones' results are now part News Corp.'s broad newspaper division, which includes a large portfolio of newspapers in the United Kingdom, Australia and the New York Post.

News Corp. didn't break out the results from Dow Jones or any other section of its newspaper holdings. The new unit was on News Corp.'s books for just the last two weeks of the reporting period, giving little effect to the bottom line.

Murdoch's News Corp. profit up 1.2 percent to 832 million dlrs

NEW YORK (AFP) - Media-entertainment giant News Corp. said Monday its quarterly profit edged higher to 832 million dollars as robust gains in television operations offset softer results from Hollywood films.

The report for the quarter to December 31 for the New York-based conglomerate headed by Rupert Murdoch partly included results from its acquisition of the Wall Street Journal and the newspaper's parent Dow Jones & Co. on December 13 for some 5.6 billion dollars.

The profit for the company's second fiscal quarter was up 1.2 percent from a year ago and in line with most analysts' forecasts at 27 cents per share.

Revenues increased 9.5 percent for the period to 8.59 billion dollars, slightly ahead of expectations.

"We are obviously proud of the results we delivered during the second quarter, the highest operating income quarter in our history, but most important is the balanced nature of our earnings momentum with double-digit growth at nearly every operating segment," the Australian-born Murdoch said in a statement.

"Our unrelenting focus on exploring new opportunities as consumer choice evolves and developing market leadership positions regardless of borders has enabled us to deliver consistently strong financial results irrespective of individual market conditions."

The company's filmed entertainment unit reported a drop in operating profit to 402 million dollars from 470 million a year earlier, hurt in part by the timing of some television program releases, offsetting a positive impact from films including "Juno" and "Alvin and the Chipmunks."

In television, profits rose sharply to 245 million dollars, led by growth at the Fox television network. Cable network programming delivered a 23 percent rise in profit to 337 million dollars, helped by the Fox News Channel.

In newspapers and information services, which includes the Wall Street Journal, operating profits increased 15 percent to 196 million dollars, News Corp. said.

Speaking in an interview on his Fox network, Murdoch said he does not believe his industry is being hurt by what some see as an economic slowdown led by the United States.

Asked whether he sees a recession coming, Murdoch said, "No, I don't. The whole world right now is doing so well."

Questioned about the impact of the US housing slump, he said, "I can only speak for the media world and we're not feeling it."

News Corporation is the umbrella company for an empire that also includes the Fox News Channel, the recently launched Fox Business Network, the New York Post newspaper, the Fox Hollywood film studios and television network and the rapidly growing Internet social networking site MySpace.

Other holdings include The Australian newspaper, London-based satellite TV company BSkyB and the US-based book publishing giant HarperCollins.

Murdoch became a US citizen in the 1980s and reincorporated the former Australian firm as a US company in 2004.

Wendy's, sans big charges, falls short

COLUMBUS, Ohio - Wendy's International Inc. said Monday that fourth-quarter earnings more than quadrupled from a year ago, when it took major charges for discontinued operations, and restaurants reported better margins despite high commodity prices.

Wendy's fell just short of Wall Street expectations, however, and warned that it faces strong economic headwinds as it considers putting itself up for sale.

The nation's No. 3 burger 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 spin off 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 $596.0 million from $596.4 million a year ago.

While Wendy's beat the $592 million in revenue expected from analysts surveyed by Thomson Financial, it fell 2 cents shy of analyst's per-share expectations.

Wendy's shares fell 5 percent, or $1.25, to $23.93 Monday. Shares traded just above the 52-week low of $22.48 after trading as high as $44.22 last summer.

Executives on Monday would not discuss progress by the committee studying company options.

Kerrii Anderson, Wendy's president and chief executive, acknowledged shareholder frustration over the length of the process and the scarcity of information about the committee's work.

"Our management continues to focus on what we can control: The business and our plans to improve it," she said.

Anderson said operations did improve in the last quarter, but she and other executives expressed concern about the effects of the weak economy and higher prices for beef, chicken, grain, fuel and paper.

Wendy's plans to offset commodity prices by increasing menu prices and cutting costs, Chief Financial Officer Jay Fitzsimmons said.

Margins at U.S. company-owned stores rose to 10.1 percent in the quarter in spite of commodity costs, the company said.

Wendy's reported last month that sales at stores opened at least a year — considered a key indicator of a retailer's strength — fell 0.8 percent at U.S. company restaurants in the fourth quarter, compared with a 3.1 percent increase in the fourth quarter of 2006. At franchise restaurants, same-store sales were up 0.2 percent for the quarter, compared with a 2.7 percent increase the year before.

Wendy's announced last week it was scrapping its eight-month-old advertising campaign that featured men wearing a red wig with braided pigtails in favor of ads with the company's familiar Wendy logo.

Anderson credited the campaign with generating attention, but said it also turned some people off.

The new campaign is more in line with what the company stands for and Anderson said, "we can't be something that we're not."

For the year, Wendy's reported a profit of $87.9 million, or 97 cents a share, compared with profits $94.3 million, or 82 cents per share, in 2006. Sales were flat at $2.4 billion.

Discounting charges or gains, Wendy's made $108 million, or $1.20, in 2007 compared with $72 million, or 62 cents a share, in 2006.

Same-store sales rose 0.9 percent for company stores in 2007 and 1.9 percent for franchise stores compared with a 0.8 percent increase in U.S. company stores and a 0.6 percent increase at U.S. franchise stores in 2006.

Billionaire investor Nelson Peltz, who controls 9.8 percent of Wendy's stock along with his allies, submitted an offer to buy Wendy's in November, but the proposed price is lower than the $37 to $41 a share that he previously said it was worth.

Wendy's, based in the Columbus suburb of Dublin, operates about 6,600 restaurants in the United States and abroad. It trails McDonald's Corp. and Burger King Holdings Inc. in the burger business.

Higher selling prices boost ADM profit

CHAMPAIGN, Ill. - Food processor Archer Daniels Midland Co. said Monday its second-quarter profit rose 7 percent as higher earnings from oilseed processing and rising demand for feed grains offset declining margins in its ethanol business.

Profit for the quarter ended Dec. 31 rose to $473 million, or 73 cents per share, from $441 million, or 67 cents per share, a year ago. Those results did not include a $225 million inventory carrying charge that the company considers a one-time event, something some Wall Street analysts questioned.

Revenue rose 50 percent to $16.5 billion from $10.98 billion last year.

Analysts polled by Thomson Financial had forecast a profit of 74 cents per share excluding one-time items on revenue of $12.75 billion.

Its shares fell 37 cents to $45.13 in midday trading after sinking as low as $43.45 earlier in the session.

Decatur, Ill.-based Archer Daniel Midland's ethanol business had a second consecutive rough quarter, but its soybean processing segment performed well and continued to reflect overseas economic growth.

"ADM's record earnings for the second quarter and first half of fiscal 2008 demonstrate the value created by and the strengths of our broadly diversified asset base and product portfolio," Chief Executive Officer Patricia Woertz said in a statement.

Oilseed processing operating profit rose 14 percent to $219 million on strong global demand for protein and oil.

Corn processing operating profit fell 18 percent to $275 million on lower ethanol selling prices and higher corn costs.

Ethanol prices, after falling late last year, have bounced back, but Woertz told analysts that questions remain about whether the country's ethanol demand can live up to the number of plants being built. ADM has two of its own, expected to start producing late this year and next, but dozens of others are being planned or built around the country.

"When you look out many quarters, the market sees a question mark about whether the full capacity as it comes on stream will have a home," she said during a conference call with analysts.

Profit in ADM's agricultural service business, which includes grain trading and transportation, more than doubled to $315 million.

"The size of the crop this year," Woertz told analysts, "has been something that has given us tremendous opportunity."

ADM's other businesses were boosted by strong wheat sales, particularly overseas. Profit was up 35.2 percent in this catchall category that also includes cocoa processing, to $146 million from $108 million.

Some analysts argued during the conference call that the $225 million one-time inventory charge should be included in ADM's results from continuing operations, which would have driven earnings down by almost 50 percent.

The charge, more than double the $107 million reported a year earlier, relates to the LIFO — last-in, first-out — method ADM uses to account for its inventory.

Woertz seemed to concede the point.

"With the higher commodity prices we've seen the last couple of years, LIFO is more of a usual charge than an unusual charge," she said.

Clorox net profit falls

CHICAGO (Reuters) - Clorox Co (CLX.N) on Monday posted lower quarterly profit, hurt by rising costs for raw materials used in products such as its Glad plastic storage bags, but a lower tax rate helped it beat analysts' estimates.

The company also lowered its fiscal year 2008 earnings forecast range due to its decision to exit the private-label food storage bags business and the November acquisition of personal care products maker Burt's Bees.

Clorox has been overhauling its supply chain and taking other steps to reduce costs, while also raising prices to try to offset soaring commodity costs.

In the past year, the company's stock has fallen 7.4 percent, compared with a rise of 2 percent for larger household products company Procter & Gamble Co (PG.N).

The maker of Clorox bleach said profit was $92 million in the fiscal second quarter ended December 31, compared with $96 million, a year earlier. Earnings per share, however, rose to 65 cents a share from 62 cents a share, helped by a lower outstanding share count.

Analysts on average forecast 54 cents a share, according to Reuters Estimates.

"It would seem that most of the favorability versus estimates was driven by timing issues in advertising and restructuring costs, and a lower tax rate," Goldman Sachs analyst Amy Chasen said in a research note.

Like many consumer products companies, Clorox has been hit by higher prices for commodities like resin, used in plastic bags, and soybean oil, used in its salad dressings.

Clorox on Monday announced a plan to increase prices by 7 percent on average on Glad trash bags and GladWare containers this month to help offset rising costs.

The price increases came sooner than expected and were consistent with competitor moves, according to Morgan Stanley analyst William Pecoriello.

"The fiscal year '08 guidance implies the benefit of this pricing will largely offset increased commodity pressure," Pecoriello said.

But with the U.S. economy slowing, analysts have also worried that Clorox will lose customers to lower-priced private-label manufacturers, especially in categories such as bleach.

"How do you convince consumers to keep buying the branded trash bags?" Morningstar analyst Lauren DeSanto said.

Still, sales rose 8 percent to $1.19 billion. Of that increase, the Burt's Bees acquisition, bleach businesses acquired in fiscal year 2007 and the weaker dollar each added 1.5 percentage points.

Volume, a measure that factors out currency and price fluctuations, rose 4 percent, excluding acquisitions, the company said.

The tax rate in the quarter was 28.4 percent, down from 33.1 percent a year ago, largely due to the completion of federal tax audits, the company said.

For the year, Clorox expects earnings of $3.20 to $3.35 a share, including one-time items. The company's previous forecast was $3.33 to $3.50.

"It appears that on an operating basis (excluding restructuring and Burt's Bees dilution, second half EPS would be coming down by 7 cents," Chasen said.

Clorox shares were down $1.15 at $61.94 in late morning on Monday on the New York Stock Exchange.

Wrigley profit misses views; N. America sales down

CHICAGO (Reuters) - Wm Wrigley Jr Co (WWY.N) on Monday posted fourth-quarter earnings slightly below analysts' estimates as sales fell in North America.

Still, the largest U.S. chewing gum maker posted stronger sales overseas and raised its quarterly dividend.

Wrigley, whose shares fell nearly 2 percent, said profit rose to $155 million, or 56 cents a share, from $128.8 million, or 46 cents a share, a year earlier.

Excluding restructuring charges, earnings were 52 cents a share, a penny below the analysts' average forecast compiled by Reuters Estimates.

Quarterly net sales increased 16 percent to $1.42 billion from $1.22 billion.

North American sales fell 2.7 percent to $454.3 million. The company said customer inventory reductions had cut into demand, while price increases had some effect on volume.

But some analysts were surprised by the decline.

Jonathan Feeney of Wachovia Securities said he had expected a 3 percent increase in North American sales and that the decline might have been at the hands of Cadbury Schweppes Plc (CBRY.L), maker of Trident and other chewing gum brands.

"Results were okay," Feeney said in a research note, "but Wrigley's valuation leaves little room for error -- and Cadbury is winning big in North America."

Trading at roughly 25.7 times estimated 2008 earnings, Wrigley has one of the highest multiples of U.S. packaged foods companies.

The company declared a quarterly dividend of 33.5 cents per share, up 16 percent from its prior payout of 29 cents.

Wrigley's board also authorized future stock repurchases of up to $800 million.

The company's shares were down 96 cents, or 1.7 percent, at $56.90 in afternoon New York Stock Exchange trade.

Low taxes and a sale boost Humana profit

LOUISVILLE, Ky. - Health insurer Humana Inc. posted a 57 percent surge in fourth-quarter earnings Monday from its growing government segment, a lower-than-expected income tax rate and a gain on the sale of a venture capital investment.

The Louisville-based company beat Wall Street projections for the three months ended Dec. 31 and also raised its profit outlook for 2008.

Net income for the fourth quarter grew to $243.2 million, or $1.43 per share, from $155 million, or 92 cents per share, a year ago. Analysts surveyed by Thomson Financial had expected profit of $1.32 per share on revenue of $6.22 billion.

Shares fell $1.98, or 2.4 percent, to $79.86 at the open of trade Monday.

For the full year, net income soared by 71 percent, to nearly $833.7 million.

Fourth-quarter revenue rose 12 percent to $6.34 billion, from $5.66 billion, with total premium and administrative services fees up 12 percent year-over-year driven by higher average Medicare Advantage membership. For the year, revenues rose 18 percent to $25.3 billion.

The company said its quarterly benefits ratio, or benefit expenses as a percent of premium revenue, totaled 80.3 percent — 290 basis points lower than the 83.2 percent ratio in the 2006 period. Humana credited fewer expenses paid out in the government and commercial segments.

Pretax earnings in Humana's robust government segment totaled $304.6 million in the quarter, compared with $187.3 million a year ago, due to its growing Medicare Advantage business.

The company said its Medicare Advantage premiums rose 22 percent to $2.8 billion in the quarter compared to a year ago, primarily due to higher average membership.

Medicare Advantage membership was 1.14 million at the end of last year, up 14 percent from a year ago and essentially unchanged from the end of September 2007. The Medicare Advantage plans offer comprehensive health coverage.

Premiums from Humana's stand-alone Medicare prescription drug plans totaled $820.3 million in the fourth quarter, down 7 percent from a year ago, primarily the result of a 2 percent decline in average membership. Membership in the company's stand-alone Medicare prescription plans was down slightly at year's end from a year earlier.

For the year, pretax earnings for the company's government segment essentially doubled to $1.03 billion, compared with $513.8 million the previous year.

Humana said that premiums and administrative services fees from its military business increased by $30.6 million to $691 million in the fourth quarter. Humana provides health insurance for military families and retirees through its Tricare program.

Pretax earnings from Humana's commercial segment rose slightly to $54.4 million in the fourth quarter, compared with $53.9 million a year ago. Commercial segment medical membership grew by 167,800, or 5 percent, to 3.45 million at the end of 2007. Nearly 96,000 of the membership increase stemmed from an acquisition completed in the fourth quarter.

For the year, pretax earnings for the commercial segment totaled $261.8 million, up 5 percent from the previous year.

Looking ahead, the company raised its earnings per share outlook for fiscal 2008 to reflect a lower tax rate, now forecasting profit of $5.35 to $5.55 per share on revenue of $28 billion to $30 billion.

Wall Street has predicted profit of $5.46 per share on revenue of $28.44 billion.

Profit plunges at Japan's top telecom

TOKYO - Nippon Telegraph and Telephone Corp., Japan's top telecommunications company, reported a 21.8 percent drop in profit for the April-December period Monday due to declines in voice and fixed-line operations.

Tokyo-based NTT's profit for the nine months fell to 320.86 billion yen ($3 billion) from 410.14 billion the same period the previous year, the company said.

NTT's fiscal year begins April 1. The company did not breakdown quarterly results.

Sales for the first three fiscal quarters edged down 1.1 percent to 7.844 trillion yen ($73.45 billion) as growing income from data transmission and broadband links took a hit from lackluster results in voice and fixed-line operations.

Although profitability declined in mobile businesses, the decrease was smaller than what was recorded the previous year, the company said.

NTT left its profit forecast unchanged for the full fiscal year to March 31 at 530 billion yen ($4.96 billion), up 11.1 percent from the previous year.

NTT shares edged up 0.6 percent to 506,000 yen ($4,737). Earnings were announced after trading closed.

ADM 2nd-quarter profit rises

CHICAGO (Reuters) - Archer Daniels Midland Co (ADM.N), a leading U.S. food processor and ethanol producer, posted higher quarterly profit on Monday, boosted by demand for protein meal and seed oil and improved results in its wheat and malt processing operations.

The improved profit comes even as corn processing profits declined due to lower ethanol prices and higher net corn costs, the company said.

ADM said earnings rose to $473 million, or 73 cents per share, in the second quarter ended December 31, from $441 million, or 67 cents per share, a year earlier.

Analysts on average forecast 74 cents a share, according to Reuters Estimates.

Sales and other operating income rose 50 percent to $16.50 billion, the company said.

ADM shares closed at $45.50 on Friday on the New York Stock Exchange. The stock is up 29 percent from a year ago.

Ryanair shares fall over poor outlook

DUBLIN, Ireland - Shares in Ryanair Holdings PLC plummeted Monday after Europe's top no-frills airline reported flat third-quarter profits and warned of tough times ahead because of high fuel costs and fears of a recession.

For the quarter ended Dec. 31, Ryanair said its net profit fell 1 percent to 47.2 million euros ($69.9 million). Sales rose 16 percent to 569 million euros ($842.7 million), while passenger numbers rose 21 percent to 12.4 million, reflecting the carrier's relentless expansion of routes across Europe.

However, Ryanair noted that its net profit included a 12.2 million euro ($17.9 million) boost from the sale of five Boeing 737-800 aircraft. Excluding the sale, quarterly net profit fell 27 percent, in line with analyst expectations.

Chief Executive Michael O'Leary reiterated Ryanair's forecast that full-year profit would rise 17.5 percent to 470 million euros ($695.6 million) — but emphasized his fears of a worsening environment from April onward.

O'Leary said it was "too early to make any accurate forecasts in such volatile markets for 2008-09." But he warned that the airline industry could be hit by higher oil prices, falling consumer demand, a weaker British currency and higher airport charges at Ryanair's biggest hubs, London Stansted and Dublin.

Ryanair shares fell more than 13 percent in the first hour of trade on the Irish Stock Exchange to 3.12 euros ($4.62), a new 52-week low.

Goodbody Stockbrokers in Dublin said O'Leary's forecast "rings alarm bells," but emphasized that Ryanair remained cash-rich and the best positioned among European airlines to exploit a weak market.

O'Leary noted that, in recent years of rising oil prices, Ryanair had benefited from advance contracts on fuel supplies. Those contracts have expired, however, he said.

The best scenario for the April 2008-March 2009 fiscal year would involve flat ticket prices and average fuel costs based on $75 a barrel, O'Leary said, about $14 below their current levels. That could produce a 6 percent gain in net profit to 500 million euros ($740 million).

His "most conservative" forecast — based on oil at $85 a barrel, falling consumer demand and a weakening British pound — suggested net profit could be cut in half to 235 million euros ($347.8 million).

Ryanair said the airline was mulling a fourth-quarter buyback of approximately 200 million euros ($300 million) shares. Analysts noted that Ryanair would be able to buy more shares for its money if it talked down its share price.

Wall St. lowers S&P 500 earnings outlook: survey

NEW YORK (Reuters) - Wall Street analysts have lowered expectations for U.S. corporate earnings in the first two quarters of 2008, after results for the fourth quarter showed conditions much worse than initially expected, according to a weekly survey by Reuters Estimates.

The survey of strategists and industry analysts showed they expect S&P 500 companies' first-quarter earnings to grow just 2.8 percent year-on-year in the first quarter and 3.5 percent in the second quarter, after falling 20.7 percent in the fourth quarter.

The outlook was gloomier than last week's expectations of first and second quarter earnings growth, respectively, of 3.8 percent and 4.2 percent, and a 17.6 percent fall in the fourth quarter.

The fourth-quarter estimate combines actual results from companies that have reported, and estimates for those that have not yet announced their numbers. Analysts expected 11.5 percent fourth-quarter earnings growth in an October 1 survey.

The survey has shown analysts are turning more wary week by week, and the latest result comes amid concerns over heavy bank losses and a prolonged downturn in the housing market.

The financial sector was seen showing the weakest performance in the fourth quarter, a 94 percent fall, amid reports of big write-downs and exposure to capital-strapped bond insurers.

For the full year, analysts forecast earnings in the financial sector to recover 21 percent in 2008 after falling 48 percent in 2007.

The technology sector was seen as the most resilient to the recent U.S. slowdown, with analysts expecting earnings growth of 23 percent in 2008 and 13 percent in 2007.

Exxon, Chevron post record profits

HOUSTON - Suppose Exxon Mobil decided to return the favor and buy you a tank of gas. Then again, why stop there? The oil giant turned a profit last year fat enough to buy a fill-up for every car, truck and SUV in America — four times.

Beating its own record to rack up the largest annual corporate profit in American history, Exxon Mobil Corp. said Friday it earned $40.6 billion for the year, reaping the benefits of crude-oil prices around $100 a barrel.

Exxon Mobil also topped its own record for profit in a single quarter, posting net income of $11.7 billion for the final three months of the year — about $1 billion more than the same period in 2005, the previous quarterly record.

The annual profit was enough, at $3 a gallon, to buy nearly four 15-gallon fill-ups for the roughly 243 million registered passenger vehicles on American roads. Put another way, it's almost equal to what Microsoft has offered to buy Yahoo outright.

And the quarterly profit alone is about the same as the size of the entire economy of Iceland or Namibia. The previous record for annual profit was $39.5 billion, posted by Exxon Mobil in 2006.

Chevron Corp., No. 2 behind Exxon Mobil among U.S. oil companies, also had its best year ever in 2007, saying Friday that it banked a profit of $18.7 billion.

The results were eye-popping but not a total surprise: For most of the fourth quarter, oil prices hovered around $90 a barrel, 50 percent higher than a year earlier. Crude reached an all-time high of $100.09 on Jan. 3 but has fallen about 10 percent since.

Revenue at Exxon Mobil rose 30 percent in the fourth quarter to $116.6 billion from $90 billion a year ago. For the year, sales rose to $404.5 billion — a figure just slightly lower than the U.S. Defense Department's fiscal 2007 budget.

Exxon Mobil, which produces 3 percent of the world's oil, pegged high commodity prices as the driver for its results but also touted its far-reaching businesses.

"We continued to supply crude oil and natural gas volumes to meet the world's energy needs through disciplined development and operation of our globally diverse resource base," said Chairman Rex Tillerson.

But at a time when many fear the U.S. economy is sliding into a recession — or is in one already — not everyone was applauding the results.

With the economy weakening and the prospect of $4-a-gallon gas looming for spring and summer, the hefty oil profits immediately renewed charges that Big Oil was profiting at the expense of most Americans.

Within hours of Exxon Mobil and Chevron reporting their results, Sen. Charles Schumer, D-N.Y., a member of the Senate Finance Committee, urged Congress to repeal tax breaks for the oil industry.

"Congratulations to Exxon Mobil and Chevron — for reminding Americans why they cringe every time they pull into a gas station and for reminding Washington why it needs to act swiftly to break our dependence on foreign oil and roll back unnecessary tax incentives for oil companies," Schumer said.

The Foundation for Taxpayer and Consumer Rights called for greater regulation of energy trading markets. The watchdog group has said congressional moves for more market oversight have been blocked by the oil industry's powerful lobbying efforts.

Many analysts believe speculative investors played a role in driving oil prices above $100.

"There's no excuse for continued inaction by Congress and the White House," said Judy Dugan, the consumer group's research director.

The criticism is nothing new to Irving-based Exxon Mobil, which has reported gargantuan profits in recent years during spikes in commodity prices. Those spikes typically make it more costly for consumers to fill their tanks and heat their homes.

In 2005, when the price for a gallon of gas first hit $3, top oil executives were hauled before federal lawmakers to explain profits and assure customers they weren't being gouged.

Industry representatives say it's important to note oil companies invest large portions of their profits back into their businesses. Exxon Mobil, for example, said Friday its spending on capital and exploration projects increased to nearly $21 billion last year, up 5 percent from 2006.

It also noted its U.S. tax bill from 2002 to 2006 was $59.9 billion, and that its worldwide effective income tax rate for 2006 was 43 percent.

What's more, finding new supplies of oil and gas is becoming increasingly more expensive and difficult. The recent boom has pushed up prices for labor and equipment, and forced the companies into more remote, challenging environments.

"These companies continue to face formidable reserve replacement, production growth and cost challenges," Moody's Investors Service said in a recent note.

Higher commodity prices were clearly evident from earnings at Exxon Mobil's exploration and production arm, where net income rose 32 percent to $8.2 billion.

Exxon's production increased nearly 1 percent from the fourth quarter of 2006, driven by higher demand for natural gas in Europe. Excluding Exxon assets that were taken over by the Venezuelan government last year and other factors, production rose nearly 3 percent.

Refining and marketing earnings came to $2.3 billion, up from nearly $2 billion in the same quarter a year ago, as improved refining operations offset lower U.S. refining margins.

Refining margins — the difference between the cost of crude and what the company makes on refined products such as gasoline — have been squeezed in recent months as spiking oil prices outpaced increases in gasoline prices and other refined products.

They also affected Chevron's quarterly earnings, which rose 29 percent to $4.88 billion as higher oil prices offset weakness in the refining sector. Revenue also rose 29 percent to $61.41 billion.

Exxon Mobil declared a quarterly dividend of 35 cents per share earlier this week — in line with its past several quarters.

Neither Exxon Mobil nor Chevron gave an outlook for upcoming financial results, though Chevron said "major" project delays have lowered its outlook for 2008 production by about 150,000 barrels of oil per day to 2.65 million barrels.

Some analysts expect refining margins to rebound as the summer driving season approaches and gasoline prices rise.

John Parry, a senior analyst with John S. Herold Inc., said if crude prices remain in the $90-per-barrel range, oil company earnings are likely to be flat or slightly lower than the most recent quarter.

Despite U.S. urging, OPEC decided Friday against increasing the amount of oil it produces, insisting that supplies were adequate and that speculators and geopolitical jitters — not oil availability — were setting prices. It said it was focused on near-term expectations.

Exxon Mobil shares fell 45 cents to $85.95 on Friday. They've traded in a 52-week range of $69.02 to $95.27. Chevron dropped 76 cents to $82.49. Its shares have traded in a range of $64.99 to $95.50 in the past year.