The Democratic nomination
Win some, lose some
Hillary Clinton wins in Puerto Rico but loses an internal party fight. How long will she stay in the race?
MANY unusual places have had a chance to shine in the primary nominating contests for America’s presidency. While early-voting Iowa, New Hampshire and South Carolina are crucial every time, the Democratic contest has gone on so long that the contest remains unresolved all the way to the final round. On Sunday June 1st Hillary Clinton celebrated a primary victory in a place not used to the limelight: Puerto Rico, a semi-independent American commonwealth. She beat Barack Obama by a big margin. Just two more states are set to have their say.
Mrs Clinton is not much closer to the nomination however. Mr Obama needs just a few dozen more delegates to win; Mrs Clinton needs over 200. She had hoped to close that gap through an internal party dispute that was decided on Saturday. The Democrats’ Rules and Bylaws Committee met the day before the vote in Puerto Rico to determine what to do about Florida and Michigan. By Democratic rules both states voted too early, so their votes were deemed invalid. In Michigan, Mr Obama even took his name off the ballot. Mrs Clinton won in both states.
As Mr Obama began to gather a lead in subsequent contests, Mrs Clinton began to argue that the votes in Florida and Michigan should count. As Mr Obama’s lead grew virtually insurmountable, her campaign became more strident. The rules committee was Mrs Clinton’s last chance to claw back some of Mr Obama’s advantage and then go on to convince a big majority of “supderdelegates” to vote for her and overturn Mr Obama’s lead. It was always a long shot.
The committee’s decision has made it near impossible for Mrs Clinton to stage a comeback. To keep Florida and Michigan happy for the November fight against John McCain, the party agreed to seat their delegates and give them half a vote each. More controversial, however, was the decision in Michigan. In that contest, fully 40% of voters opted for “uncommitted”, a vote against Mrs Clinton. The committee chose to award those delegates to Mr Obama, plus four of Mrs Clinton’s delegates.
This might look fair, given that Mr Obama’s name was not even on the ballot. But Mrs Clinton’s campaign immediately said that it would consider appealing against the decision, and so prolong the fight further. Democratic leaders are terrified that a disunited party will not have time to gear up against Mr McCain, the presumptive Republican nominee.
What matters now is how Mrs Clinton reacts. She gave a friendly shout to Mr Obama in her Puerto Rico victory speech, something she has avoided in her other recent primary wins. But she also repeated that she had won the popular vote—a claim that relies on her campaign’s assertion that she won convincingly in Michigan. It is still not clear whether she is signalling valediction or murder-suicide.
If she makes good on her threat to continue the rules challenge, even after the last votes are tallied in Montana and South Dakota on Tuesday, the party is in trouble. Women have gone colder on Mr Obama, and he has struggled with lesser-educated whites. Both will be crucial to the Democrats in November's election. If Mrs Clinton does not endorse him it will be a hard summer as he fends off attacks both from her supporters and Mr McCain’s. If she only half-heartedly endorses Mr Obama, and continues to hint that she knows she would have been a better candidate, she is doing him no favour. Against the independent-friendly Mr McCain, he will need a united party. And it remains unclear whether she has a price—like the vice-presidential slot—that will secure her help.
The coming days
The week ahead
Tackling high food prices, and other news for the coming week
• THE environment will take centre stage in America when the Senate considers legislation aimed at tackling global warming on Monday June 2nd. The Warner-Lieberman Climate Security Act has the ambitious aim of establishing a market for carbon trading and cutting overall carbon-dioxide emissions in the United States by some two-thirds by 2050. The same day a further round of UN-sponsored climate-change negotiations gets under way in Bonn, Germany.
For background see article
• WORLD leaders gather in Rome on Tuesday June 3rd for an emergency summit to discuss soaring food prices. The event is hosted by the UN Food and Agriculture Organisation. Participants are expected to pledge aid to badly affected countries and to discuss ways of boosting agriculture. There may also be a rethink of biofuels production. But some of the possible prescriptions—such as freeing trade in agricultural goods and embracing genetically modified crops—could prove controversial.
For background see article
•THE Democrats hold their final primaries in Montana and South Dakota on Tuesday June 3rd, five months after the first contest was held in Iowa. After the swings and roundabouts of this primary season nothing is certain, but many signs suggest that Hillary Clinton will pull out of the race soon after the last vote has been tallied. Barack Obama will then be free to step up his campaign for the presidential election against John McCain.
For background see article
Oil Tax Exposes Democrats' Economic Illiteracy:
Commentary by Kevin Hassett
June 2 (Bloomberg) -- With President George W. Bush's popularity fluctuating between that of a mosquito and a root canal, some Democrats inside the Beltway are beginning to express extreme optimism. Democratic victories in November, so the story goes, may be so large that sweeping policy changes will be possible in 2009.
A look at the latest Senate energy bill suggests how fundamentally perilous such an outcome would be for the U.S.
The centerpiece of the ``Consumers First Energy Act'' is a 25 percent windfall-profits tax on oil companies. According to a May 7 press release from the Democrats, the measure would ``force big oil to pay their fair share.''
Given how large oil company profits are right now, and how expensive gasoline has become, it is easy to be jealous and resentful. But those emotions don't provide sound policy justifications. In life, when you act while your emotions are hot, you inevitably regret it.
The same is true in policy. Still, that the Democrats would even propose such a thing as a windfall-profits tax is fundamentally unnerving. The proposal raises big red flags.
The first is that it undermines the rule of law and discourages future investment by all entrepreneurs, not just oilmen. This problem is well-known in economic circles.
Politicians always have a temptation to promise companies that tax rates will be modest, and then switch these rules once the companies start to make money. Since the switch occurs after the firms set up their factory or oil well, then one might think it will do no harm. After all, the companies aren't going to stop operating.
Dishonest Partner
But the double-cross will signal to all would-be new investors that they are playing with a dishonest government partner. If their business becomes highly profitable, every businessman's dream, then the government is going to change the rules. This year it is oilmen; last year it was private-equity firms. Next year, it could be you.
The second red flag is raised by a special condition applied to the windfall-profits tax. Quoting again from the Democratic press release: ``This provision would not apply to the profits those companies reinvested in clean, affordable, domestically produced renewable fuels, expanding refinery capacity and utilization, or renewable electricity production.''
In other words, if oil companies invest in alternative energy, then those investments will shield their profits from the tax.
Government Hubris
This type of micromanagement of corporate activity smacks of hubris. To the extent that oil companies aren't investing to the Democrats' satisfaction in alternative fuels, they are doing so because they have either decided that such investments aren't economically promising, or because they don't feel they have a sufficient comparative advantage over other types of firms (chemical companies, for example) that might better make those investments.
If this policy achieves its desired objectives, then it will induce firms to take on activities that haven't passed a market test. That can't be a good idea.
The micromanagement also reflects a logical inconsistency. Lifting windfall-tax rates with bait-and-switch tax policy can only be defended as a revenue raiser if firms don't respond rationally to incentives.
Yet the special provision exempting profits invested in pursuit of alternative fuels only works if firms respond to incentives. Both measures taken together only make sense if firms respond to the provisions Democrats want them to respond to, but don't respond to the provisions Democrats don't want them to respond to.
Economic Illiterates
Goodness. Can anyone really be that naive to think the companies won't respond to the windfall-profits tax but will respond to the alternative-fuel incentives?
The scariest part of all of this is the thumbnail sketch that emerges of any politician who would propose such madness. He would have to be an economic illiterate, unable or unwilling to think through complexities, or to accept the notion that policies can have unintended consequences. He must also be a panglossian optimist about the effectiveness of government intervention.
Such a person would be capable of proposing just about anything without surprising us much.
Consider the Possibilities
He could increase marginal tax rates on everyone, since he would reason that work incentives don't affect labor supply. He could lift the minimum wage by $5 or $10, because he wouldn't expect employers to respond by cutting jobs. He could raise corporate tax rates, because he wouldn't think companies will choose to locate their manufacturing in lower-tax countries. He might even propose strict limits on hamburger consumption, because he knows better than you do what your diet should be.
Perhaps it is true that nobody could be that crazy, and that any administration will eventually allow economists into the policy-making process. Maybe so, but I would feel a lot better if those economists could have an influence during the election cycle.
(Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He is an adviser to Republican Senator John McCain of Arizona in his bid for the 2008 presidential nomination.)
Wall Street Says -2 + -2 = 4 as Liabilities Get New Bond Math
June 2 (Bloomberg) -- Leave it to Wall Street to profit from its own distress.
Merrill Lynch & Co., Citigroup Inc. and four other U.S. financial companies have used an accounting rule adopted last year to book almost $12 billion of revenue after a decline in prices of their own bonds. The rule, intended to expand the ``mark-to- market'' accounting that banks use to record profits or losses on trading assets, allows them to report gains when market prices for their liabilities fall.
The new math, while legal, defies common sense. Merrill, the third-biggest U.S. securities firm, added $4 billion of revenue during the past three quarters as the market value of its debt fell. That was the result of higher yields demanded by investors spooked by the New York-based company's $37 billion of writedowns from assets hurt by the collapse of the subprime mortgage market.
``They can post substantial gains as a result of a decline in their own creditworthiness,'' said James Cataldo, a former director of treasury risk management for the Federal Home Loan Bank of Boston and now an assistant professor of accounting at Suffolk University in Boston. ``It's completely legitimate, but it doesn't make sense by any way we currently have of thinking of net income.''
The paper profits have helped offset more than $160 billion of writedowns taken by U.S. financial-services companies during the past year. Now some investors and analysts say the winnings are illusory and may have to be reversed.
``The piper will have to paid eventually,'' said Robert Willens, a former Lehman Brothers Holdings Inc. accounting analyst who left the New York-based firm earlier this year to become an independent consultant.
Statement 159
The debate over what is known as Statement 159 adds to the number of accounting techniques called into question as the U.S. debt market unravels. Investors have criticized banks for booking some writedowns in an accounting category called ``other comprehensive income'' that bypasses their income statements. Accounting rulemakers are now proposing changes to standards that let banks use off-balance-sheet vehicles to juice earnings without tying up precious capital.
Statement 159, formally known as the ``Fair Value Option for Financial Assets and Financial Liabilities,'' was issued in February 2007 by the Financial Accounting Standards Board, or FASB, which sets U.S. accounting rules. It was adopted by most large Wall Street firms in the first quarter of last year and becomes mandatory for all U.S. companies this year, although they have wide latitude in how to apply it, if at all.
Lobbying Effort
The rule was enacted after lobbying by New York-based companies, led by Merrill, Morgan Stanley, Goldman Sachs Group Inc. and Citigroup, which wrote letters to FASB arguing that it wasn't fair to make them mark their assets to market value if they couldn't also mark their liabilities.
``We do not believe it would be appropriate'' to let investors consider creditworthiness when valuing bonds if the issuing company couldn't do the same, wrote Matthew Schroeder, managing director of accounting policy at Goldman, the largest U.S. securities firm by market value, in an April 2006 letter.
Companies are allowed to decide for themselves which of their outstanding bonds, loans and other liabilities will get mark-to- market treatment. That's an unprecedented degree of leeway, said Willens, who is also an adjunct professor at Columbia University in New York.
``It's kind of a dumb rule,'' Willens said. ``In the entire panoply of accounting, this is the most flexible and elective and optional rule that we have.''
The Fed Objects
Here's how it works, according to Richard Bove, an analyst at New York-based Ladenburg Thalmann & Co. A company decides to designate $100 million of its subordinated bonds as subject to mark-to-market accounting. The price of the bonds drops to 80 cents on the dollar from 100 cents. So the firm books $20 million on the ``presumed savings that you have on your liabilities,'' Bove said.
``In the real world you didn't save a dime,'' he said. ``You still owe the $100 million. It's another one of these accounting rules that basically takes you further and further away from reality.''
The Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Office of Thrift Supervision objected to the rule before its passage, saying in a joint 2006 letter to the FASB that it would ``have the contrary effect'' of increasing a bank's net worth at the same time its ``financial condition is deteriorating.''
Split at FASB
The regulators remain so skeptical that they refuse to let banks apply the phantom revenue toward minimum capital requirements, according to reporting rules posted on the Web site of the Federal Financial Institutions Examination Council. Deborah Lagomarsino, a Washington-based spokeswoman for the Federal Reserve, declined to comment.
Not even the FASB was united on the new standard. Two of its seven board members -- Thomas Linsmeier and Donald Young -- voted against it, according to the February 2007 statement. Linsmeier said the rule ``will provide an opportunity for entities to report significantly less earnings volatility than they are exposed to,'' according to the statement.
The FASB tried to limit abuses by forcing companies to designate their ``fair value'' liabilities when they adopt the new standard. Subsequently, they can't change their minds. Liabilities added after adoption can only be designated at inception.
``The statement was thoroughly discussed with users and preparers'' in advance of its publication, said Neal McGarity, a spokesman for Norwalk, Connecticut-based FASB. A March survey by the CFA Institute, a Charlottesville, Virginia-based group that administers a financial-analyst designation program, showed that 74 percent of investors believe the standard ``has improved market integrity,'' he said.
Merrill's Liabilities
Merrill designated about $166 billion of liabilities, or 17 percent of its total, as fair-value instruments subject to mark- to-market accounting at the end of 2007, according to its annual report. Included in the amount were $76.3 billion of long-term borrowings and $89.7 billion of payables under securities- financing transactions.
Prices for the firm's bonds tumbled over the past year: Its floating-rate notes due in January 2015 are trading at about 87 cents on the dollar, compared with about 100 cents last June.
Merrill has said its gains from the liabilities don't add to true earnings power. In a spreadsheet posted on its Web site, Merrill says that investors who want a ``more meaningful period- to-period comparison'' should exclude the $2.1 billion of revenue recorded in the first quarter.
Merrill spokeswoman Jessica Oppenheim declined to comment. The company owns a passive 20 percent stake in Bloomberg LP, the parent of Bloomberg News.
Lehman to Goldman
Lehman, the fourth-biggest securities firm, has reported $1.9 billion of gains related to a widening of its own bond spreads. Citigroup, the largest U.S. bank by assets, has booked $1.7 billion; Morgan Stanley $1.7 billion; JPMorgan Chase & Co., the third-biggest bank, $1.7 billion; and Goldman Sachs $550 million.
There may be more to come, JPMorgan analyst Kenneth Worthington wrote in a May 28 report. Lehman may book $325 million for the second fiscal quarter ended in May, and Morgan Stanley, the second-biggest U.S. securities firm, may report $470 million, Worthington estimates.
Spokesmen for Lehman, Morgan Stanley, Goldman, Citigroup and JPMorgan in New York declined to comment.
`Shell Game'
So far, most banks' writedowns are ``unrealized,'' meaning they've been unwilling or unable to liquidate distressed assets. If prices reversed, the banks would record mark-to-market profits.
The same is true for the liabilities. Companies can't ``realize'' the mark-to-market gains on their debt unless they buy it back at the discounted price. They're unlikely to do so, because the deterioration in creditworthiness means they'd have to replace the debt with higher-cost borrowings, Willens said.
``No one's going out in the market and actually retiring this debt,'' Willens said. ``It's a shell game.''
David Moser, Merrill's managing director for accounting policy, acknowledged that concern in an April 10, 2006, letter to the FASB.
``It seems counterintuitive that when a company's credit spreads are widening, it would recognize a gain in earnings,'' Moser wrote. ``The amounts are typically not realizable and therefore less relevant.''
He nevertheless supported the new accounting standard because it ``mitigates some of the uneconomic volatility in earnings'' that results from marking assets to market without doing the same for liabilities.
Market Reversal
Bear Stearns Cos., which adopted the new standard this year, reported a $305 million windfall in the fiscal first quarter, which ended in February, as bond spreads widened on concerns the company might face a funding shortage. Then in March, after the New York-based securities firm was forced to sell itself to JPMorgan, Bear Stearns's bond spreads tightened, resulting in a $372 million loss, according to a regulatory filing in April.
Worthington estimates that similar tightening of bond spreads at Merrill, Morgan Stanley, Lehman and Goldman Sachs may cause them to reverse $5.96 billion of revenue by the end of the year.
``It could very well hurt earnings,'' said Jeffery Harte, an analyst at Sandler O'Neill & Partners LP in Chicago, in an interview. On the flip side, a recovery may result in asset write- ups, he said.
Standard & Poor's, which relies on banks' financial statements to issue credit ratings, said in April 2006 that the new rule might lead to ``diminished analytical transparency.''
``Equity may be overstated as a result of these illusory gains that may never be realized, hindering the analysis of the equity cushion to absorb losses,'' S&P Chief Accountant Neri Bukspan wrote in a letter to the FASB.
If and when the ``illusory'' revenue is reversed as losses, the banks and brokers may have to work harder to convince investors to ignore them, Willens said.
Clinton Puerto Rico Win Doesn't Revive Nomination Bid (Update1)
June 2 (Bloomberg) -- Hillary Clinton's uphill bid for the Democratic Party's presidential nomination suffered further blows after a compromise in a dispute over Michigan and Florida delegates barely enabled her to chip into Barack Obama's commanding lead -- and low turnout in Puerto Rico ended any chance of winning the popular vote overall.
With just two primaries remaining tomorrow, Obama is almost certain to win the nomination even with Clinton's 2-to-1 victory in Puerto Rico yesterday. The Obama camp said it expects this week to get the 2,118 delegates needed to clinch the nomination at the Democrats' August convention, and many experts agree.
``It's more than likely that within a week or two that Senator Obama will have enough votes to claim that he's going to be the nominee,'' Democratic Senator Carl Levin of Michigan, who is neutral in the race, said on CBS's ``Face the Nation'' yesterday.
``Her candidacy is dead,'' said Julian Zelizer, a public- affairs professor at Princeton University in New Jersey.
Coming into the weekend, Clinton trailed Obama by 200 delegates. A party compromise on seating delegates from the uncontested races in Michigan and Florida, which were stripped of their delegates for holding early primaries, netted Clinton little more than two-dozen pledged delegates. Under the ruling, each delegate from the two states will get a half a vote.
New York Senator Clinton's win in Puerto Rico put her on track to pick up about two-thirds of the 55 delegates at stake there.
Delegate Count
Overall, she may have had a net gain of as many as 50 delegates over the weekend, leaving her at least 150 behind Obama, an Illinois senator. There are just 31 pledged delegates at stake in tomorrow's contests in South Dakota and Montana, making Clinton's task next to impossible. Moreover, all of the movement of so-called superdelegates -- who are drawn from party leaders and lawmakers and aren't bound by voters' preferences -- is toward Obama.
He picked up endorsements from two more superdelegates today and has at least 2,072 delegates overall, 46 shy of the number needed for the nomination; Clinton has at least 1,914. There are fewer than 200 uncommitted superdelegates, and most are likely to go to Obama, along with the majority of those from Montana and South Dakota.
Popular Vote
Clinton's supporters argue that she is winning the popular vote. Yet going into Puerto Rico, she trailed Obama by more than 275,000 votes. Those figures include the votes in Florida, where the candidates agreed not to campaign. They don't include the results from Michigan, where the candidates didn't campaign and Obama took his name off the ballot.
In Puerto Rico, Clinton scored a net gain of fewer than 150,000 votes, leaving Obama with an overall lead of 125,000, more than enough to offset any gains she may make in South Dakota or Montana.
Clinton yesterday continued to predict she would win the most popular votes, though such assertions aren't likely to carry much weight after this weekend.
``I will lead in the popular vote; he will maintain a slight lead in the delegates,'' she said at a rally in San Juan, Puerto Rico, adding that the race would come down to the superdelegates.
While vowing to fight on, she hinted that could change. ``I'm sort of a day-at-a-time person,'' she told reporters aboard her campaign plane after the Puerto Rico primary. ``We'll see when Tuesday and the day after Tuesday comes.''
Unity Pledge
Obama, 46, has taken on the air of a general-election candidate. Speaking at a rally in Mitchell, South Dakota, he said he called Clinton, 60, to congratulate her. He said the Democrats would be able to put their differences aside in time to take on the presumptive Republican nominee, Senator John McCain of Arizona.
Clinton ``is going to be a great asset when we go on to November to make sure we defeat the Republicans,'' Obama said.
The Democratic Party committee's ruling May 31 to give the Florida and Michigan delegations half a vote was a disappointment for the Clinton campaign.
Clinton supporters said they were satisfied with the Florida decision. They raised the prospect of a floor fight at the convention over the way the Michigan dispute was resolved, saying Obama was awarded too many delegates.
Michigan Results
Clinton's campaign chairman, Terence McAuliffe, left open the possibility that the senator would ask the convention credentials committee to overturn the decision on the Michigan delegates.
``We are going to keep our options open,'' he said yesterday on ABC's ``This Week'' program.
McAuliffe wouldn't say whether Clinton would concede if Obama wins enough delegates this week to reach the 2,118 threshold.
Obama's communications director, Robert Gibbs, predicted the contest may soon be over.
``Sometime this week, we'll probably have a nominee for the Democratic Party,'' Gibbs said on ``This Week.''
Obama has picked up more than three times as many superdelegate endorsements as Clinton in the past three months. At the start of the nominating contests Jan. 3, Clinton had 169 superdelegate endorsements to Obama's 63, according to the Associated Press.
``It's pretty clear that once we get past the primaries, Obama will be very close to the new magic number,'' said David Redlawsk, a political-science professor at the University of Iowa. ``The pressure is on superdelegates to announce.''
ISM Factory Index in U.S. Shrank Less Than Forecast (Update3)
June 2 (Bloomberg) -- Manufacturing in the U.S. contracted less than forecast in May, easing concern the economic slump will intensify.
The Institute for Supply Management's factory index rose to 49.6 from 48.6 in April, the Tempe-Arizona-based group said today. Fifty is the dividing line between contraction and expansion.
Demand from overseas for U.S.-made products is helping to keep factories running even as spending by American consumers and businesses slows. The improvement signals the U.S. may be able to avoid a deep and protracted economic slowdown as the housing slump worsens and food and fuel prices soar.
``Export industries are still seeing very strong orders,'' Brian Bethune, chief U.S. financial economist at Global Insight Inc. in Lexington, Massachusetts, said in a Bloomberg Television interview. ``The overseas markets are growing at very good rates.''
Economists forecast the index would decrease to 48.5 from 48.6 in April, according to the median of 75 projections in a Bloomberg News survey. Estimates ranged from 46 to 50.5.
Spending on U.S. construction projects in April fell for a second consecutive month, hurt by weakening homebuilding and less work on offices and highways, the Commerce also reported. The 0.4 percent decrease followed a 0.6 percent drop the prior month that was smaller than previously reported. Private residential building dropped 2.3 percent, the 26th consecutive monthly decline.
Stocks, Treasuries
Stocks maintained losses following the reports and yields on Treasury securities remained down. The yield on the benchmark 10-year note was 4 percent at 10:39 a.m. in New York, compared with 4.06 percent late in the day on May 30.
ISM's gauge of new orders increased to 49.7 from 46.5, while a production measure rose to 51.2 from 49.1, ISM said. A gauge of supplier deliveries fell to 53.7 from 54 the prior month.
Factory production has slowed as sales have weakened. Purchases of cars and light trucks fell to 4.83 million in the first four months of the year, the lowest level since 1995, according to Autodata Corp. in Woodcliff Lake, New Jersey.
Ford Motor Co. has said industry sales may drop to a 15- year low of 14.7 million in 2008. The second-biggest U.S. automaker is slashing production for the rest of the year, mostly for trucks. It also plans to eliminate more jobs.
Consumer spending rose at the slowest pace in more than six years last quarter and is forecast to continue to slow. The slowdown combined with higher raw material costs is prompting companies to limit new investments.
Costs Jump
The ISM's measure of prices paid increased to 87, a four- year high, from 84.5 a month earlier. Economists surveyed by Bloomberg News forecast the gauge would rise to 85.
Slowing demand has made it hard for some companies to raise prices to make up for record energy and food costs.
Rising energy and petrochemical prices will add a record $500 million in costs to Rohm & Haas Co. and prompt the world's biggest maker of acrylic-paint ingredients to shut down some of its plants, Chief Operating Officer Pierre Brondeau said in a May 28 interview.
The company will announce ``in the next couple of weeks'' details of plant closings in North America and Europe, part of a plan to save costs by consolidating production among fewer facilities, he said.
Metals, Fuel
Raw material costs may continue to hurt businesses in coming months. Futures prices for copper, nickel and crude oil have reached records in the last two months and remained near those levels since.
Even with these challenges, businesses are not contracting as deeply as they did in previous recessions. While the Institute for Supply Management's manufacturing index fell to a five-year low of 48.3 in February, it was still well above the 42.1 reading reached in February 2001, a month before the start of the 2001 recession.
A shrinking trade deficit contributed 0.8 percentage point to first-quarter U.S. economic growth, the Commerce Department said May 29. The economy expanded at a 0.9 percent annual pace.
The ISM's export measure climbed to 59.5, the highest since May 2004, from 57.5 in April.
Dell Inc., the world's second-largest personal-computer maker, last week reported a first-quarter profit that exceeded analysts' estimates as sales overseas outstripped U.S. orders for the first time.
Gains Overseas
``The faster-growing end markets clearly are not in North American, but in Asia, Latin America and Eastern Europe,'' Illinois Tool Works Inc. Chief Executive Officer David Speer said May 28 in a presentation at the Sanford C. Bernstein & Co. conference in New York.
Businesses outside North American will generate 60 percent of Illinois Tool Works's revenue in four or five years, compared with about half now, the company said.
The supply managers group's inventory index fell to 48 from 48.1 and its gauge of order backlogs dropped to 46 from 51.5. The employment index increased to 45.5 from 45.4.
The Labor Department is scheduled to release its report on May payrolls on June 6. Manufacturers have lost jobs every month since July 2006.
U.S. Stocks Retreat, Led by Banks; Wachovia, JPMorgan Decline
June 2 (Bloomberg) -- U.S. stocks fell for the first time in five days after Wachovia Corp. ousted its chief executive, dragging down banking stocks and reigniting concern about more subprime losses.
Wachovia tumbled to the lowest level since 1995 after saying Chief Executive Officer Kennedy Thompson will step down following losses that cost the fourth-largest U.S. bank more than half its market value. Financial shares, which tumbled to a five-year low, started their retreat on U.K. lender Bradford & Bingley Plc's warning that the housing market is deteriorating in Great Britain. Unisys Corp., the manager of computer services for the U.S. Army, posted the steepest decline in the Standard & Poor's 500 Index after Merrill Lynch cut the shares to ``underperform.''
The S&P 500 lost 14.66, or 1.1 percent, to 1,385.72 at 10:31 a.m. in New York. The Dow Jones Industrial Average declined 136.87, or 1.1 percent, to 12,501.45. The Nasdaq Composite Index retreated 29.26, or 1.2 percent, to 2,493.4. Four stocks dropped for each that rose on the New York Stock Exchange.
``There's a long healing process here as we get out of this subprime mess,'' Lincoln Anderson, who helps oversee about $270 billion as the Boston-based chief investment officer at LPL Financial, said in an interview on Bloomberg Radio. ``We're underweight in financials and are still going to be careful in that sector.''
Eighty-one of 92 financial shares in the S&P 500 fell, contributing the most to the benchmark index's retreat. Treasury Secretary Henry Paulson, speaking in Abu Dhabi, warned that there will be more ``bumps in the road'' before markets recover. The group has led the S&P 500's 11 percent retreat from an October record as bank writedowns and credit losses stemming from the subprime-mortgage market's collapse approach $400 billion worldwide.
Wachovia Retreats
European stocks dropped for the first time in four days, while Asian shares rose.
Wachovia fell $1 to $22.80. Chairman Lanty Smith was appointed interim CEO, the Charlotte, North Carolina-based company said today.
``We still are in a very tough operating financial environment for these institutions,'' Michael Nix, a portfolio manager at Greenwood Capital in Greenwood, South Carolina, said in an interview on Bloomberg Television. ``Until we see some clarity in those measures, it will be hard to invest in banks overall.''
Citigroup, the biggest U.S. bank by assets, dropped 40 cents to $21.49. Bank of America, the second-largest, fell 55 cents to $33.46. JPMorgan, the third-biggest, lost 77 cents to $42.23.
Bradford & Bingley
Bradford & Bingley plunged 24 percent in London trading after saying it plans to sell shares at a 33 percent discount. The lender will sell a 23 percent stake to TPG Inc. for 179 million pounds ($353 million). The company said repayments three months or more in arrears rose to 2.16 percent of total loans at the end of April from 1.63 percent on Dec. 31.
Lehman Brothers Holdings Inc., which has tumbled 45 percent in New York trading this year, dropped 61 cents to $36.20. Merrill lowered its recommendation on the fourth-biggest U.S. securities firm to ``underperform'' from ``neutral,'' citing the potential for writedowns on the firm's ``illiquid'' securities.
The KBW Bank Index lost 1.9 percent to 74.46, its lowest since April 2003.
Unisys lost 28 cents to $4.78.
Hotels Slump
Marriott International Inc. spurred a retreat in companies that rely on consumers' disposable income after the world's largest lodging chain said second-quarter North American revenue will increase at a slower pace than it previously forecast on slumping demand in the U.S. Marriott shares lost 61 cents to $32.30.
Starwood Hotels & Resorts Worldwide Inc. declined $1.22 to $47.18. Wyndham Worldwide Corp. dropped 50 cents to $21.38. The S&P 500 Consumer Discretionary Index retreated 0.8 percent, with 69 of its 86 members posting losses.
Energy shares declined after prices for oil and gasoline fell. Crude for July delivery dropped 1.1 percent to $125.91 a barrel in New York as a tropical storm missed Mexico's biggest oilfield and investors reduced holdings of the commodity.
Exxon Mobil Corp., the biggest U.S. oil company, lost 97 cents to $87.79. Chevron Corp., the second-largest, retreated 94 cents to $98.21.
Airlines including Delta Air Lines Inc. and Southwest Airlines Co. fell after the International Air Transport Association said the industry may report a collective loss of $6.1 billion this year as spiraling fuel costs and a slowing economy wipe out earnings.
Airlines `Struggling'
``All airlines are struggling with the problem of higher fuel prices which account for the largest part of their costs,'' said Matthias Jasper, head of equities at WGZ Bank in Dusseldorf. ``Especially U.S. airlines haven't reached the end of the tunnel yet and will probably get deep into the red.''
Delta declined 21 cents to $5.94. Southwest lost 8 cents to $12.98.
The Institute for Supply Management's factory index rose to 49.6 from 48.6 in April, the Tempe-Arizona-based group said today. Fifty is the dividing line between contraction and expansion. Economists forecast the index would decrease to 48.5 from 48.6 in April, according to the median of 75 projections in a Bloomberg News survey.
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