Finance & Business World

Warren Buffett’s Berkshire Hathaway has reported a 43 percent jump in fourth-quarter profit thanks to the strong performance of BNSF railroad and a paper gain of $1.4 billion on the company’s derivative contracts and investments.

Buffett said Saturday in his annual letter that the acquisition of the Burlington Northern Santa Fe railroad was the highlight of 2010 for his Omaha, Neb.,-based company.

Berkshire reported $4.38 billion net income, or $2,656 per Class A share, in the fourth quarter instant credit report. That’s up from the $3.1 billion net income, or $1,969 per Class A share, a year ago.

The three analysts surveyed by FactSet expected Berkshire to report earnings per Class A share of $1,690 in the fourth quarter.

Berkshire’s revenue grew nearly 20 percent to $36.2 billion from $30.2 billion last year.

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Moody’s Investors Service on Tuesday downgraded its outlook for Japan’s credit rating because of concerns over its massive national debt.

The rating agency changed its outlook for Japan’s Aa2 rating from stable to negative.

In January, Standard & Poor’s cut Japan’s credit rating from AA to AA- for the first time in almost nine years due to concerns over ballooning debt.

Moody’s said the downgrade was due to “increasing uncertainty” over Japan’s ability to implement effective measures to rein in rising debt guaranteed payday loan.

Japan’s debt ratio is already among the highest in the developed world.

The finance ministry estimated in January that the country’s public debt would swell to 997.7 trillion yen ($12 trillion) by March 2012, up from 943 trillion yen this year.

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WENTZVILLE

First Banks narrowed its loss in the fourth quarter as it reduced costs associated with bad loans.

First Banks, the privately-held holding company for Clayton-based First Bank, posted a loss of $51.4 million in the quarter compared to a $153.8-million loss a year ago.

First Banks reduced its provision for loan losses to $52 million in the fourth quarter, compared to $63 million in the same quarter a year ago.

First Banks’ nonperforming assets, including nonaccrual loans, and other real estate and repossessed assets, decreased 16.1 percent in the fourth quarter, to $103.2 million, compared to a year ago.

“We strengthened our balance sheet significantly during the fourth quarter as a result of the significant decline in both nonperforming assets and construction loans, as well as the payoff of our remaining term secured borrowings,” said First Banks’ president and Chief Executive Terrance McCarthy in a statement. “While these actions contributed to our net loss for the fourth quarter, we believe they better position us for earnings improvement in 2011.”

For all of 2010, First Banks reported a loss of $191.7 million, compared to a loss of $427.6 million in 2009.   

Additionally, holders of First Banks’ trust preferred securities agreed to changes in its securities agreement in an effort to boost capital for the holding company. First Bank initiated a consent solicitation for holders of preferred securities in October and extended a November deadline for the consent until Jan. 21  

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The internal watchdog of the Securities and Exchange Commission is investigating an allegation that the agency’s enforcement chief gave a break to two Citigroup executives when the bank settled charges of misleading investors.

Inspector General David Kotz confirmed Tuesday that his office recently began a review at the request of Sen. Charles Grassley, R-Iowa. Grassley passed the anonymous written allegation to Kotz. It said that the SEC enforcement director, Robert Khuzami, directed his staff to drop planned civil fraud charges against the executives after having a “secret conversation” with an attorney representing Citigroup who is “a good friend” of Khuzami.

An SEC spokesman says the Citigroup settlement followed a careful review of evidence and held the executives accountable.

Kotz’s review was reported earlier Tuesday by Bloomberg News.

Citigroup agreed in July to pay $75 million to settle the SEC’s charges it misled investors on about $50 billion in potential losses from securities linked to subprime mortgages. The agency also settled charges with former Chief Financial Officer Gary Crittenden, who agreed to pay a $100,000 civil penalty, and the former head of investor relations, Arthur Tildesley Jr., who agreed to pay $80,000.

The charges against Crittenden and Tildesley involved negligence rather than fraud. They neither admitted nor denied the allegations under terms of the settlement.

SEC spokesman John Nester said Tuesday the settlement “appropriately held the company and individuals accountable. It was the product of a thorough investigation and a careful evaluation of the evidence and the applicable law.”

“We stand ready to assist and cooperate fully” with the inspector general’s review, Nester said in a statement.

Jon Diat, a spokesman for New York-based Citigroup, declined to comment.

Grassley said that if the allegation is true, it is “exactly” the sort of conduct that he and another senior members of the Senate Judiciary Committee urged the SEC to stop in their report on the agency’s handling of an insider trading case.

“It isn’t appropriate for senior SEC officials to secretly meet with lawyers for the other side and then make major decisions about the case without the knowledge or involvement of the career government attorneys doing the day-to-day work,” Grassley said. “The SEC supposedly implemented a policy to stop this.”

A federal judge initially declined in August to approve the settlement, asking SEC attorneys why the bank’s shareholders should be punished for the alleged misdeeds of Citigroup executives. She approved it in October after Citigroup pledged to maintain new policies it adopted to avoid similar violations in the future.

The anonymous letter also was sent to Rep. Darrell Issa, R-Calif., the incoming chairman of the House Oversight and Government Reform Committee.

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With just two days to go before Christmas, the country

Manufacturing in the Philadelphia region expanded in December at the fastest pace since April 2005 as orders and the factory workweek increased.

The Federal Reserve Bank of Philadelphia’s general economic index unexpectedly rose to 24.3 from 22.5 last month. The gauge was forecast to decrease to 15, according to the median estimate in a Bloomberg News survey. Readings greater than zero signal expansion in the area covering eastern Pennsylvania, southern New Jersey and Delaware.

Growth in China and other emerging economies, corporate purchases of new equipment and stronger consumer spending are bolstering production. Manufacturing may keep powering an economic recovery that Fed policy makers this week said has been slow to create jobs.

“It certainly adds to evidence that growth is accelerating,” said Jim O’Sullivan, global chief economist at MF Global Inc. in New York. “There is pretty good momentum going into the new year.”

Estimates in the Bloomberg survey of 59 economists ranged from 5 to 20.5.

Stocks were little changed after the manufacturing figures. The Standard & Poor’s 500 Index rose less than 0.1 percent to 1,235.36 at 10:39 a.m. in New York. Treasuries fell, pushing up the yield on the benchmark 10-year note to 3.54 percent from 3.53 percent late yesterday.

Jobless Claims

Another report from the Labor Department today showed fewer Americans than forecast filed claims for jobless benefits last week, a sign the labor market is improving. Applications for unemployment insurance dropped by 3,000 to 420,000.

The Philadelphia Fed bank’s new orders measure climbed to 14.6, the highest since February, from 10.4 in November. A measure of the average workweek increased to 19.3 in December, the highest since March 2004, indicating hiring may soon pick up.

The shipments gauge decreased to 7.3 from 16.8 last month. The employment index fell to 5.1 from 13.3 last month, which was the highest since August 2007 payday loans lenders.

The index of prices paid jumped to 51.2, the highest since July 2008, from 34 the prior month, while its gauge of prices received increased to a two-year high of 10.7 from minus 2.1.

Empire State

The overall Philadelphia Fed’s index isn’t composed of the individual measures, so some economists consider it a gauge of sentiment among manufacturers. The New York Fed’s factory measure, released yesterday, rebounded to 10.6 this month from minus 11.1 in November.

Economists monitor the New York and Philadelphia Fed factory reports for clues about the Institute for Supply Management national figures on manufacturing during the month.

The ISM will release its report on Jan. 3. The measure last month fell to 56.6 from a five-month high of 56.9.

Manufacturing makes up about 11 percent of the economy and is getting a boost from expanding world trade. Exports rose 3.2 percent in October to the highest level since August 2008, according to Commerce Department data released Dec. 10. Business spending on equipment and software advanced at a 17 percent annual rate in the third quarter.

Broadcom Corp., the biggest maker of chips for television set-top boxes, yesterday increased its fourth-quarter revenue projection to about $1.9 billion, the top end of an earlier forecast range. Irvine, California-based Broadcom is making inroads in the mobile-phone market, supplying radio chips for handsets from South Korea’s Samsung Electronics Co. and Finland’s Nokia Oyj.

“We have seen now an extended period of time of recovery in the components business,” Paul Reilly , chief financial officer of Arrow Electronics Inc., said yesterday at a conference in New York. Melville, New York-based Arrow is a distributor of electronic components and computer products to industrial customers.

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The Toronto stock market was little changed in early trading Tuesday as investors look to an afternoon announcement from the U.S. Federal Reserve on interest rates and economic conditions.

The S&P/TSX composite index was off 7.09 points to 13,288.76 while the TSX Venture Exchange gained 1.56 points to 2,132.32.

The Canadian dollar shed early gains against the U.S. dollar, down 0.24 of a cent to 99 cents US.

Analysts aren

Worldwide oil demand hit its highest level ever on the back of explosive growth in the developing world, according to preliminary figures in a recent report.

But the world’s thirst for the hot commodity is unlikely to lead to the price spike witnessed in 2008 — largely due to oil field investments made during the last bubble, analysts say.

Globally, oil demand hit 88.3 million barrels a day in the third quarter of 2010, according to preliminary numbers released earlier this week from energy consultants Wood Mackenzie. That tops the previous quarterly record of 88 million barrels a day, reached in the fourth quarter of 2007.

The developing world led the rebound, according to the report, with gasoline demand rising 8% in China and 11% in India.

Oil demand in much of the developed world has been flat or declining in the last couple of years, partially due to the recession and partly due to conservation measures put in place over the last several years. Many analysts expect that trend to continue.

"The global market for oil is diverging as never before," said Francis Osborne, an oil analyst at Wood Mackenzie. "In the emerging markets, it has generally been full speed ahead."

Supply and Demand: Auto sales statistics illustrate this well: The Chinese are expected to buy 18 million cars in 2010 — a 32% jump from 2009, according to the China Association of Automobile Manufacturers. In the U.S., about 11.5 million cars are expected to be sold; a 10% increase for the country after a dismal 2009.

Worldwide, oil demand is poised to grow by 2.5 million barrels a day in 2010 — one of the largest growth rates on record, according to the Wood Mackenzie report. Eighty-five percent of that growth is expected to come from the developing world.

But despite the voracious appetite, few analysts expect prices to surge like they did in 2008, when oil hit $147 a barrel online pay day loans.

That’s because the world can produce more oil now than it could then.

Oil flashback: In 2008, the difference between what the world could produce and the amount it consumed — known as spare production capacity in industry parlance — was only about 1 million barrels.

That meant that rebels in Nigeria, hostilities in Iran, or a hurricane in the Gulf of Mexico could conceivably knock out enough production to cause an actual oil shortage. It was one of the main reasons cited for the run up in prices in 2007-2008.

Now that’s no longer the case. Thanks to investments in Canada’s oil sands, the deepwater Gulf of Mexico, Iraq and Saudi Arabia; the world can now produce about 5 million more barrels a day than it uses, said Branko Terzic, an oil analyst at Deloitte & Touche.

Prices: "On a fundamental supply and demand basis, I think prices will be pretty much steady as she goes," Terzic said.

Citibank futures analyst Tim Evans also foresees oil prices to continue hovering in their current $80 to $90 range for the next year.

Despite China’s rapid growth, Evans said that on a worldwide basis — with oil prices high enough to both encourage new production and crimp demand — the overall oil supply picture looks pretty balanced.

In fact, he blamed even $90 oil on investment money flowing into the sector — not supply and demand.

"Where is demand exceeding supply?" he asked. "Not on the Gulf Coast; not at the gas pump. Only on the New York Mercantile Exchange."  

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Traders are wrong to underestimate the Swedish central bank’s determination to raise interest rates as credit risks overshadow inflation targets in shaping policy, said Deutsche Bank AG, the world’s biggest currency trader.

Forward-rate agreements in Sweden show traders expect the repo rate to reach about 2.5 percent by the end 2012, compared with the bank’s forecast for an average rate of 2.9 percent in the last three months of that year. For late next year, traders expect a repo rate of about 2 percent, in line with the bank’s outlook.

Governor Stefan Ingves says the Riksbank needs to keep raising interest rates to quell credit growth and stem imbalances in the country’s housing market. Two of his board’s six members say higher rates aren’t necessary because inflation is below the bank’s 2 percent target. According to Henrik Gullberg, Deutsche Bank currency strategist, the financial crisis is forcing the Riksbank and other central banks to look beyond inflation targeting as they search for tools to tackle looming asset bubbles.

“We know what happens if you leave asset bubbles alone,” Gullberg said in an interview. “History shows that the Riksbank has been more right than the market during hiking or cutting cycles — the market has been too backward looking, too late to actually start believing what the Riksbank says it will do.”

The potential for more rate increases means the currency is poised for further appreciation, Gullberg said. Deutsche Bank expects the krona to strengthen to below 8 against the euro “longer-term,” compared with an average of about 9.13 this month. Gullberg also says “the risk for bond yields is on the upside — there’ll be higher rates across the board.”

Housing Market

The Riksbank will probably raise the repo rate a quarter point to 1.25 percent this month, according to Deutsche Bank and Citigroup Inc. Policy makers meet on Dec. 14 and announce their decision the following day.

The repo rate will average 1.3 percent next quarter, 2 percent in the fourth quarter of next year and 2.9 percent by the end of 2012, according to the Riksbank’s rate path.

Sweden’s December 2012 forward-rate agreement was at 2.95 percent yesterday. The contract settles to the three-month Stockholm interbank offered rate, which has averaged about 40 basis points more than the bank’s repo rate over the past five years. A basis point is 0.01 percentage point.

Gullberg isn’t the only analyst who says a bet against the Riksbank may backfire. Societe Generale SA also says it doesn’t make sense to trade against the bank’s forecasts.

Riksbank Right

“Recently, the Riksbank has been right in its forecasts, so there was no big reason to bet against them,” said David Deddouche, a foreign-exchange strategist at Societe Generale in Paris. “It hasn’t been profitable to bet against them in the last year at least.”

Headline inflation accelerated 0.3 point to 1.8 percent in November, Stockholm-based Statistics Sweden said yesterday. The rate has lagged behind the bank’s target since December 2008.

Inflation will average 1.7 percent next year and 2.2 percent in 2012, the Riksbank estimates. Inflation adjusting for the impact of mortgage costs will hover below the bank’s 2 percent target through 2013, according to the bank’s October outlook.

By contrast, house prices have risen for 18 consecutive three-month periods, and increased an annual 5 percent in the October quarter, the statistics office said on Nov. 17. Household borrowing has averaged 10.7 percent a month over the past six years, according to data compiled by Bloomberg.

Ingves said he “personally” has taken the development of household debt into account when raising rates, warning of the risk of financial imbalances if rates don’t continue to rise, in a Nov. 11 speech.

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