Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


Buffett optimistic as operating profits rise
By Jonathan Birchall in New York
Copyright The Financial Times Limited 2010
Published: August 7 2010 00:06 | Last updated: August 7 2010 00:06
http://www.ft.com/cms/s/0/da79468a-a1ad-11df-9656-00144feabdc0.html


Warren Buffett’s Berkshire Hathaway group expressed guarded optimism about the US economy on Friday, saying as it reported second-quarter results that it was “hopeful that recent economic improvements will continue over the remainder of 2010 and beyond”.

The group saw operating profits from its businesses climb 73 per cent in the second quarter against a year ago, supported by its acquisition of Burlington Northern Santa Fe railroads and stronger results from both insurance and its NetJets business.

In its regulatory filing, Berkshire said that operating results for many of its manufacturing, service and retailing businesses had improved, “reflecting some stabilisation of economic conditions”.

Berkshire’s net income dropped 40 per cent from a year ago, to $1.97bn or $1,195 per Class A share, as weak global stock markets depressed the value of its derivatives contracts.

However, excluding investments, operating profit rose to $3.07bn, or $1,866 per share, ahead of Wall St’s average forecast.

Berkshire recorded $2.1bn losses on the market value of its derivatives, compared with a $2.3bn profit a year ago, when it benefited from the recovery in global equity markets. The majority of the derivatives are equity index term put options with an average contract life of 11 years.

Credit default swaps lost $320m, compared with a gain of $391m in the year-ago quarter.

Insurance operations, Berkshire’s biggest business, saw operating profit jump 23 per cent to $1.55bn, with underwriting profit increasing seven times to $462m.

The results included $603m of profit from Burlington Northern, after the first full quarter of ownership. Berkshire paid $26.5bn to take full control of the second-largest US railroad, in which it previously held just over 20 per cent, in February.

Burlington Northern’s revenues increased 23 per cent against the quarter a year ago to $4.09bn and delivered pre-tax earnings of $974m. The company said the raised revenues were due to “increased industrial products and agricultural products freight volume over the first six months and stronger consumer products volume in the second quarter”.

Berkshire’s NetJets fractional jet ownership company also reported significantly improved results, with a $57.5m pre-tax profit, after seeing a $252.5m loss in the second quarter last year, as the US economy slumped.

During the company’s annual meeting in May, Mr Buffett praised the performance of NetJets, saying he owed his lieutenant David Sokol “enormous” credit for turning the business round.

Berkshire’s Class A shares closed down $785 at $120,600, and its Class B shares closed down 36 cents at $80.47 in New York.






Germany’s growth predicted to surge
By Ralph Atkins in Frankfurt and Guy Dinmore in Rome
Copyright The Financial Times Limited 2010
Published: August 6 2010 22:18 | Last updated: August 6 2010 22:18
http://www.ft.com/cms/s/0/ae945322-a183-11df-9656-00144feabdc0.html


German growth in the three months to June could outpace any quarter since the state’s reunification in 1990, analysts said on Friday after strong industrial production data for Europe’s largest economy appeared to boost economic prospects across the continent.

With full eurozone gross domestic product data set for release next Friday, gross domestic product in Germany may prove to have risen by as much as 2 per cent in the second quarter compared with the previous three months, economists calculated.

Dekabank in Frankfurt and Barclays Capital in London on Friday both forecast a German second-quarter GDP increase of up to 2 per cent.

With signs of ripple effects of German growth reaching other eurozone countries, this could put growth in the 16-country region back on a self-sustaining path, although from a low base.

Italy on Friday reported a respectable 0.4 per cent increase in second-quarter GDP, with the country benefiting from stronger exports to Germany, its largest foreign market.

Spain, one of the countries at the centre of the crisis over eurozone public finances, has also seen growth creeping higher. Its central bank forecast Spanish GDP rose by 0.2 per cent in the second quarter.

The figures highlighted a turnround in eurozone fortunes since May when the region’s financial turmoil was at its most intense. “For sure, it is still mainly Germany that is powering growth, but the good news is that confidence indicators show at least some stabilisation in the countries hit worst affected by the crisis,” said Peter Vanden Houte, European economist at ING in Brussels.

Eurozone governments have withdrawn emergency economic stimulus measures, so policymakers are eager to see whether the recovery has generated its own momentum.

In the US, the Federal Reserve has taken a cautious stance, indicating it is prepared to take further action if necessary. But the European Central Bank this week struck a more optimistic tone, saying growth in the third quarter was likely to exceed previous forecasts – though Jean-Claude Trichet, ECB president, said he was not yet “declaring victory”.

Italy’s government has denied that its €25bn ($33bn, £20.8bn) fiscal austerity package covering 2011 and 2012 will blow the country’s recovery off-track.

Gilles Moec, European economist at Deutsche Bank, pointed out that the severest eurozone fiscal measures were focused on the countries hit worst by the crisis over public finances. A more decisive factor for future growth prospects would be patterns of demand elsewhere. “The problem is going to be what happens in the rest of the world,” he said.

Unemployment has also stabilised in the eurozone, albeit at a high level, and is falling in Germany. A rise in consumer confidence could reduce the share of incomes put into savings, resulting in further spending in the shops.

German industrial production fell by 0.6 per cent in June compared with May, according to the Berlin economics ministry. But that followed several months of rapid growth. Second-quarter industrial production was 5.4 per cent higher than the previous quarter.

Growth in Germany and Italy has also been lifted by companies restocking inventories – a sign of confidence returning.






Hurd departure wipes $10bn off HP
By Richard Waters in San Francisco
Copyright The Financial Times Limited 2010
Published: August 7 2010 00:18 | Last updated: August 7 2010 00:18
http://www.ft.com/cms/s/2/957e6bbc-a1af-11df-9656-00144feabdc0.html


The value of Mark Hurd, one of Silicon Valley’s best-regarded business leaders, was spelt out in no uncertain terms by Wall Street on Friday.

Within minutes of Hewlett-Packard disclosing the departure of its chief executive amid allegations of unethical behaviour, nearly $10bn was wiped from its stock market value.

There could have been no clearer signal of the confidence that Mr Hurd’s no-nonsense business style has instilled since he took the helm of a troubled HP more than five years ago. Over that period HP’s shares have doubled, while the broader US stock market has gone sideways.

HP moved quickly to try to contain the damage, reassuring Wall Street about its current performance by raising its earnings guidance and ruling out any broader impact on the company from the allegations against Mr Hurd.

Given his close identification with HP’s turnround, however, and with no obvious heir-apparent, the damage caused by the cloud of uncertainty now hanging over the company was rapid.

Mr Hurd had already skated around one corporate scandal at HP that could have claimed his career at the company. Soon after his arrival in 2005, the company’s chairwoman, Patricia Dunn, was forced to resign after it emerged that she had used private investigators to “pretext” journalists, tapping into their private phone records.

It later emerged that Mr Hurd had also been given information about the nature of the investigations, although he said he had not read the reports and was unaware of the details.

The sudden loss of Mr Hurd marks the third time HP has been forced into a search for a new leader. Carly Fiorina, a former senior executive from Lucent and now Republican candidate for senator in California, was brought to try to revive HP after it missed out on much of the tech industry’s growth boom during the dotcom years.

She was later replaced by Mr Hurd, however, after failing to bring enough operational discipline to the sprawling conglomerate.

A former boss of NCR, the computer maker once owned by AT&T, Mr Hurd brought an attention to detail and “no-excuses” management policy that proved an effective formula for rekindling HP’s earnings growth.

More recently, he had embarked on a series of acquisitions to strengthen the company’s presence in a range of markets, including EDS in services, Palm in smartphones and 3Com in computer networking.

However, some Wall Street analysts had started to raise questions about the success of his acquisitions.

HP said it would again look outside the company in its search for a new leader, though the hunt would include potential in side candidates. Ann Liver more, head of HP’s services division was quickly identified by several analysts at a likely contender, along with Todd Bradley, a former boss of Palm and now head of HP’s PC division.





Investors fear re-run of great grain robbery
By Isabel Gorst in Nizhny Novgorod, Russia
Copyright The Financial Times Limited 2010
Published: August 6 2010 18:09 | Last updated: August 6 2010 23:25
http://www.ft.com/cms/s/0/2d8599c8-a177-11df-9656-00144feabdc0.html


“We have had almost no rain for three months,” says Vladimir Kochetkov, a manager at one of the biggest state-owned farms in Nizhny Novgorod, in the heart of European Russia.

“There has not been such a long drought here for more than one hundred years,” he adds, with an air of resignation. The grain crop at the 8,000 hectares of farmland he manages has been halved by the lack of rain.

He is not alone in facing a ruined crop. In the area around Nizhny Novgorod, about 400km east of Moscow, officials fear the grain harvest will drop to 600,000 tonnes, less than half last year’s 1.4m. “It’s a disaster,” says Alexander Efremtsev, at the Nizhny Novgorod Grain Union.

Hot summers are not unusual in Russia’s grain belt, which stretches from the Black Sea to Siberia and enjoys some of the world’s most fertile soil.

This year, a severe heat wave and drought have destroyed the country’s grain crop, pushing farmers to the brink of bankruptcy and exposing the fragility of world food supplies. Prices of everyday food staples including bread are likely to jump as a result.

Global wheat prices soared this week on news of the deteriorating Russian harvest. European milling wheat has surged 80 per cent in the last six weeks alone, stirring memories of the 2007-08 food crisis. The acute shortage of supplies and fears of even steeper rises in wheat and food prices spurred the Kremlin on Thursday to announce an export ban on grains until the end of the year.

The ban, which surprised traders and food companies, set wheat markets on fire. In Chicago, US wheat hit an intraday high of $8.41 a bushel on Friday, up more than 25 per cent on the week and, excluding the 2007-08 food crisis, a record high.

The prices of other crops, from corn and soyabean to rapeseed and barley, used to make beer, have also jumped sharply. This wider rally reflects not just the direct impact of the drought on these commodities, but the risk that lower supplies of wheat, which is also used to feed livestock, will lead to higher demand for alternative animal feed such as corn.

The panic buying comes as traders predict Russia’s exports will drop to just 3m tonnes – the total shipments that left the country before the export ban – far below the 18m tonnes it sold overseas last year, worth $2.7bn, after a bumper crop.

Luke Chandler, grains analysts at Rabobank in London, says the sudden shortfall in global supplies coincides with Russia’s rise to prominence as an important exporter, particularly for North Africa and Middle East countries, which, he says, are “becoming increasingly reliant on Russia”.

Importing countries and food companies will now have to rely on wheat from the European Union, the US, Australia and Argentina. Traders and analysts say there are enough stocks to bridge the gap left by Russia, but no safety cushion. In other words, the weather between now and the harvest in Australia in December needs to be perfect.

The long-term consequences of the drought and the export ban remain unclear. Analysts, though, point out that the Black Sea region is well known for its volatile grain production. It was a drought in the same area that triggered sweeping grain purchases by the Soviet Union in 1972, an episode that became known as the “Great Grain Robbery”. Moscow corralled all exportable supplies for the US.

This year’s crop failure marks a major setback for the Kremlin, which is carving a role for Russia as a global grain power. Dmitry Medvedev, Russian president, has set a goal to double its grain exports by 2020 and challenge US supremacy.

The US exports half the world’s corn, a third of its soyabeans and a fifth of all wheat, making America the powerhouse of agricultural markets.

Agriculture is one of four industries being prioritised by the Kremlin as it tries to overturn the disastrous legacy of Stalin’s collectivisation. A decade ago Russia depended on US wheat imports to feed itself, but government reforms, including a law allowing foreigners to buy land, have boosted interest in farming.

Grain harvests have risen steadily since 2000, driven by more generous state subsidies and growing Russian and foreign investment in farming and food processing. There is room for more – Russia is one of the only countries in the world with the potential to increase sharply grain production. According to the World Bank, the country could double its annual harvests if farming methods were modernised and idle land put to use.

Analysts and farming executives say the crisis is likely to accelerate the consolidation of Russian agriculture already under way, allowing big conglomerates to swoop on struggling small farmers.

Black Earth Farming, an international company farming in Russia, says its winter harvest is down 44 per cent but that it will keep investing. “We are here for the long term. This is a tough year but it will not scare us off,” says Gustav Wetterling, its head of investor relations.

Dmitry Rylko, the director of the Moscow-based Institute for Agricultural Market Studies, says the failed harvest, while creating “tremendous difficulties”, is unlikely to lead to an exodus of investors. “Russia is extremely promising for agriculture,” he says. “We have been lucky with the harvest for almost ten years. Crop failures happen everywhere from Argentina to Brazil and Ukraine.”

Additional reporting by Javier Blas in London