U.S. Economic/Financial News

Congress Moves To Stop Airlines Takeovers

The Senate Commerce, Science, and Transportation Committee, now headed by Democrat Daniel Inouye of Hawaii, has set hearings for Jan. 24 on airline takeovers. Committee member Sen. Byron Dorgan (D-N.D.) said, "I don't think we need less competition, I think we need more. From the standpoint of consumers, I don't think it's beneficial to see some of the largest carriers marry up." A staffer for the chairman of the House Transportation Committee, Rep. James Oberstar (D-Minn), told ABC News Jan. 11 that Oberstar has "very strong concerns" about any airline mergers; and Oberstar himself has said he wants to stop the biggest potential takeover, of bankrupt Delta Airlines by recently bankrupt USAirways.

On Jan. 10, USAir announced an increase in its hostile bid for Delta, from $8 billion to $10 billion. Of that, $5 billion would be borrowed from UBS AG and other banks, and thus become new debt piled on Delta while in bankruptcy! In fact, USAir CEO Michael Parker, a bank/hedge fund puppet, is insisting on the takeover during the bankruptcy in order to get the judge to impose a new round of salary and job cuts on the airline's unions. It would also shrink the combined airline's flights and fleet by more than 10%.

In this lunatic merger, USAir's borrowing would go to pay unsecured creditors of Delta—those who are not supposed to get paid in a bankruptcy reorganization plan. In fact, Delta management, which opposes the offer, is now drawn into a bidding contest, to see how much it can borrow to pay off these same unsecured creditors without a takeover! The apparent referee is Norman Bethune, the former butcher of Continental Airlines in the 1990s, who has become head of a committee of Delta creditors which is trying to decide Delta's fate. Bethune calls himself "a proponent of stabilizing the industry by consolidating."

Citigroup Suffered $370 Million Loss in Japan

Citigroup will take a $370 million loss for the fourth quarter 2006, in its consumer finance branch unit in Japan, Reuters reported Jan. 9. It will close 270 out of 320 consumer branch offices, and 100 of its 800 automated loan machines. Citibank's brand, which operates under the brand name DIC, ranks 5th or 6th in the Japanese consumer finance business.

The background is that there was a change in Japanese law that cut the maximum allowable interest charged on consumer loans to 15-20%, depending on the type of loan. The current interest charged on loans is 29.2%. Further, the Japanese Supreme Court ruled that charges on loans in the range of 20 to 29%— which had represented a gray zone—were illegal.

In 2004, Japanese regulators took the big step of revoking Citigroup's license to operate its Private Bank in that country, in a publicized scandal, charging Citigroup with insider trading, violating anti-money-laundering laws, etc.

Oil Price Fall Continues; Derivatives Market Threatened

The price of oil continued to fall during the second week in January: oil futures for next-month delivery closed Jan. 9 at $55.56 per barrel on the New York Mercantile Exchange (NYMEX), which is down 29% from its record high of $78.40 per barrel on July 14, 2006; it is the lowest level since June 2005.

HedgeCo.net reported Jan. 5 that hedge funds are losing money on their oil and commodities bets, and that the losses could be like those that the multi-billion-dollar Amaranth hedge fund suffered in Sept. 2006, on natural gas futures bets, which bankrupted that firm.

This is hitting the stock markets of nations in which oil plays a large role. Russia's stock index, RTS, plunged 6.4% on Jan. 9, with MarketWatch observing it was "weighed down by another sharp sell-off in the energy pits [i.e., oil]." On Jan. 9, Norway's Oslo All-Share stock index fell 1.6%.

More Government Fakery on Housing Market

According to Mark Zandi, chief economist at Moodys/Economy.com, the U.S. Commerce Department figures reported for new home sales both significantly overstate the level of new home sales, and understate the inventory of new homes listed for sale, because the Commerce Dept. does not take into account cancellations of new home contracts.

The background is that the Commerce Dept. tallies new home sales each month, based on a sampling of contracts signed by new home buyers. However, for example, if a contract to buy a home, signed in November, is cancelled in December, the Census Bureau does not subtract the failed transaction from the number of reported sales. And a flood of cancellations is taking place. Economy.com's Zandi estimated that between 150,000 and 200,000 home sales that never took place are counted by the Commerce Department. That's 15% to 20% of the officially reported new home sales!

Likewise, Commerce is not adding the homes whose sales contracts have been cancelled, into the inventory of unsold homes, thereby significantly understating this inventory, as well.

Yet, based on this fakery, at its December meeting, the Federal Reserve Open Market Committee baldly said in its minutes, "Sales of new and existing homes showed tentative signs of stabilizing."

Homebuilders Report Continued High Rate of Cancellations

Fort Worth, Texas-based D.R. Horton, the nation's largest homebuilder, said sales orders for new homes fell 23% during its fiscal first quarter ended Dec. 31, to 8,771 homes, down from 11,463 a year earlier. Its cancellation rate was 33%, down slightly from 40% in the fourth quarter. "[W]e continue to experience higher-than-normal cancellation rates and an increased use of sales incentives in many of our markets," chairman Donald Horton said. Meanwhile, Scottsdale, Ariz.-based Meritage Homes Corp. said quarterly net sales orders tumbled 42% from a year earlier; while cancellations rose to a record-high 48%.

Fed: Biggest Threat to Economy Is Wage Increase

Donald Kohn, a vice president of the Atlanta Federal Reserve sees a risk of inflation from an increase in minimum wage, he told the Atlanta Rotary Club Jan. 8. "What would be problematic would be a pickup in the growth of nominal hourly labor compensation that was passed through to prices over the next several quarters, or one that was not matched, over a sustained period, by a comparable pickup in the growth of productivity. Eventually, the resulting faster growth of unit labor costs would pose a serious threat to price stability...."