Date: 1/19/2009
By ALAN ZIBEL
AP Real Estate Writer
WASHINGTON (AP) — When it comes to homeownership, Hispanics in New Jersey, single parents in California and senior citizens in Rhode Island all have something in common: More than a third have an unaffordable mortgage.
Inequality in America has traditionally followed familiar patterns of race, age and education. Those long-standing gaps have been magnified by the real estate boom and now the historic bust, according to an Associated Press analysis of 2007 Census Bureau data.
While minorities have made significant gains in wealth and home ownership since 1990, “things are going into reverse gear,” and now the homeownership rate for blacks and Hispanics is falling, said Edward Wolff, a New York University economist who studies income and wealth distribution.
Nearly 9.5 million households, or nearly one out of every five of the nearly 52 million homeowners with a mortgage, spend 38 percent or more of their pretax income on their mortgage payment, property taxes and insurance, the AP’s analysis found. That’s the new threshold to qualify for the loan assistance program launched last month by Fannie Mae and Freddie Mac, the mortgage finance companies now under government control.
Not surprisingly, the most financially burdened are in California, Florida, Nevada and the Northeast, areas hardest hit by soaring home prices and now foreclosures.
Yet in every state, there are many pockets of homeowners who are just one unexpected medical bill or car repair from falling behind on their mortgages and setting the foreclosure clock ticking.
The AP’s analysis reveals the enormous scope of the U.S. housing market bust and how unevenly the burdens are spread, both geographically and demographically. And the situation is worsening — a record 10 percent of U.S. homeowners with a mortgage are at least one payment behind or were in foreclosure as of last fall, compared with 7.5 percent a year earlier and just under 6 percent in 2006.
The burden is clearly more arduous among minority households, the AP analysis found.
Just under a third of Hispanic homeowners spend at least 38 percent of their income on housing expenses, compared with about a quarter of Asian and black households and nearly 16 percent of white households.
In much of the country, the trend is more pronounced. For example, included among those who spent at least 38 percent of their income on housing are:
About 40 percent of black borrowers in California, Nevada, Oregon and Massachusetts.
More than 30 percent of of Asian borrowers in California and Florida.
Nearly half of Hispanic homeowners in Rhode Island and at least 40 percent in Alaska, California, Florida, Hawaii, Maryland, New Jersey and New York.
Many Latino families wound up with expensive subprime mortgages because they often have cash income and no bank account, said Janis Bowdler, associate director for wealth building at National Council of La Raza in Washington.
It is common for Latino families to have stable incomes, but limited credit histories — and hence lower credit scores, which lenders use to gauge risk. Many have multiple sources of income, some of it in cash.
During the housing boom, consumer advocates say it was both faster and more profitable for mortgage brokers and loan officers to put Hispanic families in loans that didn’t require proof of income, but charged higher interest rates.
“They had them out the door in a fraction of the time,” Bowdler said. “They were definitely getting more expensive loans.”
Now, Hispanic households like the Cazares family of Visalia, Calif are caught up in the mortgage crisis. Out of work for more than a year after contracting a rare disease caused by an airborne fungus, Joel, 36, brings in $550 a week in disability payments. His wife Maria, 34, makes about that much money weekly by working as a hair stylist.
They haven’t made their $2,500 home loan payment in four months. The couple, who have three kids, have been waiting since October for a loan modification from IndyMac Bank, which was seized by the federal government last July. They hope it will bring their payment down to a more manageable level of around of $1,500.
In the meantime, they buy supersized bags of generic cereal to make ends meet. They’ve canceled their Internet service and are only using one of their two cars, a pickup truck, because it gets better gas mileage.
Our money’s like a piece of gum,” Joel Cazares said. “We’re making it stretch as far and as long as we can.”
The AP’s analysis also found that education level is highly correlated with income and mortgage expenses. Nearly one in three of those without a high school or college diploma spend at least 38 percent of their income on housing, compared with only 12 percent of those with advanced degrees, the AP analysis found.
In addition, seniors spent a far higher share of their income on housing than any other age group.
While about half of seniors own their homes outright, the other half often face financial challenges and diminished earning potential.
Among seniors with a mortgage, nearly three in 10 spend at least 38 percent of their income on housing, according to the AP analysis. The stress is most severe in nine states: California, Washington D.C., Florida, Massachusetts, Nevada, New Jersey, New York, Rhode Island and Vermont.
As the pain from the mortgage crisis spreads, Washington is abuzz with talk of new efforts to stabilize the housing market and stop the freefall in home prices. President-elect Barack Obama has pledged to direct up to $100 billion in financial bailout money toward a sweeping effort to prevent foreclosures.
Frustrated housing counselors around the country say that if the Bush administration had grasped the severity of the foreclosure crisis earlier and enacted more ambitious programs long ago, the pain for American families and the economy might not be so severe.
“So far, we haven’t seen the mortgage products or resources that we really need to help people who are at risk of losing their homes,” said Brenda Clement, executive director of the Housing Action Coalition of Rhode Island.
To be sure, housing counselors acknowledge that some borrowers only have themselves to blame. They clearly got in over their heads and many knowingly took out risky loans. But they also say that mortgage brokers and lenders took advantage of the elderly, immigrants and the unsophisticated.
For decades, the government and most lenders considered homeowners who spent 30 percent or more of their income on housing to be financially strapped.
But that rule of thumb got thrown out the window during the housing boom. When prices were soaring, many Americans could only afford to buy a home by taking out ever-riskier home loans. Lenders were happy to cooperate, because if the homeowner defaulted, the property could still be sold for enough money to cover the loan.
House-rich and giddy, American attitudes about debt and the risks that go with it changed dramatically.
“The average American is in hock up to his eyeballs,” said David Wyss, chief economist at Standard & Poor’s in New York.
That’s especially true now that prices are falling and around 13 million households, or about one in four with a mortgage, owes more to the bank than their properties are worth, according to Mark Zandi, chief economist at economic forecasting firm Moody’s Economy.com
One of those “underwater” borrowers is Heather Noble, 36, who lives outside Detroit and can see five foreclosures from her front porch. A single mother, she struggled to make her mortgage payment since being laid off from her job in October 2007.
Late last summer, she started a $17-an-hour job handling billing for a doctor’s office, b
ut making her home loan payment of around $1,000 a month was a stretch because her take-home pay is at most $1,600 a month, depending on the amount of time she works.
Starting last spring, she spent hour after hour on the phone talking to what she describes as “every human being and division possible” at JPMorgan Chase & Co., before obtaining approval for a loan modification.
Noble’s modification had been held up until the fall, and she was actually blocked from making her monthly payment until the Associated Press made an inquiry into her case. “In the large volumes that we’re handling, we occasionally will miss something,” spokesman Tom Kelly said.
Her two home loans have now been modified. Effective Feb 1., her new monthly payment will be a much more affordable $683 a month.
“That I can pay,” she said. “Now I can pay my bills and stay current and not worry about losing my house.”
Among single parents like Noble, more than a quarter in Michigan and about 27 percent nationwide spend at least 38 percent of their income on housing. And in California the strain is far worse: About four in 10 single parents meet that threshold.
And what worries Avis Holmes, director of Detroit Non-Profit Housing Corp. in Detroit, is that much of the government’s financial aid isn’t targeted at those who are in the greatest danger of losing their homes.
So far, Holmes said, “there are no rescue funds for the homeowners.”
__
AP Data Specialist Allen Chen contributed to this report.
Copyright 2009 The Associated Press.
Analysis: Nobody wants blame in automakers’ crisis
Date: 12/5/2008
By DAVID ESPO
AP Special Correspondent
WASHINGTON (AP) — Not surprisingly, neither the outgoing Bush administration, President-elect Barack Obama nor the Democratic leaders of Congress wants to be blamed for the loss of a once-proud domestic auto industry and the disappearance of hundreds of thousands of jobs.
But that’s not the same thing as a three-way agreement on legislation to save General Motors Corp., Ford Motor Co., and Chrysler LLC, an accord that presumably could clear the House and Senate with relative ease and be signed into law.
Instead, maneuvering in a sort of political twilight zone, two administrations and the Democratic leaders of Congress all give rhetorical support to the survival of the industry while trying to reassure recession-weary taxpayers there will be no blank check from the federal treasury.
“Nothing concentrates the mind like a death sentence,” Sen. Christopher Dodd, D-Conn., said Thursday at the end of a daylong Senate Banking Committee hearing. “And we’re looking at a death sentence here if we don’t respond intelligently and prudently.”
In the ways of Washington, there are several competing options afloat, each with its own set of supporters.
The White House likes one; Speaker Nancy Pelosi, D-Calif., another. Some Republicans prefer bankruptcy — let the marketplace decide. There’s also a prepackaged bankruptcy option, drawing interest among some Democrats despite opposition from the United Autoworkers Union. Its intent is to permit all three companies to survive.
Detroit’s Big Three, nominally seeking $34 billion in aid, say they would accept a government-run restructuring.
Then there is the hope-the-Federal Reserve-steps-in option, the one that allows the politicians to avoid compromise.
As for the CEOs of the Big Three, they are now on a bizarre sort of government no-fly list, for fear that boarding their corporate jets would invite more ridicule for their role in presiding over the collapse of an entire industry. This time, they drove to the Capitol from Detroit, bearing blueprints for using bailout billions to remake their industry economically viable.
The early reaction was underwhelming.
At the White House, spokeswoman Dana Perino said it’s “too early to say” whether their assessment was correct.
Obama, pointing out that there is only one president at a time, said earlier in the week that the Big Three had “a more serious set of plans” than they did the last time their chiefs testified in front of Congress.
That drew a double-barreled barb from Rep. Barney Frank, D-Mass. chairman of the House Financial Services Committee.
“He’s going to have to be more assertive than he’s been,” Frank said of the president-elect. “At a time of great crisis with mortgage foreclosures and autos, he says we only have one president at a time. I’m afraid that overstates the number of presidents we have. He’s got to remedy that situation.”
The leading Democrats in Congress, Pelosi and Senate Majority Leader Harry Reid put it this way several days ago in a letter to the Detroit carmakers. “The auto companies’ shareholders, business partners and prospective benefactors — the American people — deserve to see a plan that is accountable to taxpayers and that is viable for the long-term.”
The new plans in hand, Sen. Bob Bennett, R-Utah, observed: “to come up with the answer to those complicated questions (in) 72 hours, is something that Congress is frankly not equipped to do.”
Whatever the financial and economic issues, the political knot is a complicated one.
The administration says federal law does not permit the use of any of the $700 billion financial bailout fund to help the auto industry. Instead, aides say President George W. Bush would sign legislation that makes use of $25 billion originally slotted for loans to help the carmakers retool their factories to make environmentally friendlier products.
Pelosi and Reid counter that the Treasury has clear authority to tap the bailout funds if the president chose.
Additionally, Pelosi, allied with environmentalists, opposes the use of the money the administration favors, saying it is already spoken for.
Reid agrees that the administration can and should tap the bailout money, and seems more amenable than the speaker to making use of the funds that Bush has proposed tapping.
Senate Republicans currently control 49 seats and generally support Bush’s point of view, it also appears at present to be the only way for a bailout to pass.
Republicans and Democrats alike, speaking on condition of anonymity, agree that in refusing thus far to compromise, all sides are betting that General Motors and Chrysler, in particular, will survive into the new year.
On Jan. 20, the Bush administration will pass into history, and Democrats will have larger majorities in both houses of Congress than is now the case — and complete responsibility for the fate of auto industry legislation.
Especially, consider Reid’s perspective.
Nearly half of the $700 billion bailout fund has been committed, and helping Detroit almost certainly would require tapping into the second half of the fund — a step that requires a vote in Congress.
Inconveniently, perhaps, Reid will be looking out at five new Democratic senators who opposed the bailout when it cleared Congress last fall.
___
EDITOR’S NOTE — David Espo is AP’s chief congressional correspondent.
Copyright 2008 The Associated Press.
By DAVID ESPO
AP Special Correspondent
WASHINGTON (AP) — Not surprisingly, neither the outgoing Bush administration, President-elect Barack Obama nor the Democratic leaders of Congress wants to be blamed for the loss of a once-proud domestic auto industry and the disappearance of hundreds of thousands of jobs.
But that’s not the same thing as a three-way agreement on legislation to save General Motors Corp., Ford Motor Co., and Chrysler LLC, an accord that presumably could clear the House and Senate with relative ease and be signed into law.
Instead, maneuvering in a sort of political twilight zone, two administrations and the Democratic leaders of Congress all give rhetorical support to the survival of the industry while trying to reassure recession-weary taxpayers there will be no blank check from the federal treasury.
“Nothing concentrates the mind like a death sentence,” Sen. Christopher Dodd, D-Conn., said Thursday at the end of a daylong Senate Banking Committee hearing. “And we’re looking at a death sentence here if we don’t respond intelligently and prudently.”
In the ways of Washington, there are several competing options afloat, each with its own set of supporters.
The White House likes one; Speaker Nancy Pelosi, D-Calif., another. Some Republicans prefer bankruptcy — let the marketplace decide. There’s also a prepackaged bankruptcy option, drawing interest among some Democrats despite opposition from the United Autoworkers Union. Its intent is to permit all three companies to survive.
Detroit’s Big Three, nominally seeking $34 billion in aid, say they would accept a government-run restructuring.
Then there is the hope-the-Federal Reserve-steps-in option, the one that allows the politicians to avoid compromise.
As for the CEOs of the Big Three, they are now on a bizarre sort of government no-fly list, for fear that boarding their corporate jets would invite more ridicule for their role in presiding over the collapse of an entire industry. This time, they drove to the Capitol from Detroit, bearing blueprints for using bailout billions to remake their industry economically viable.
The early reaction was underwhelming.
At the White House, spokeswoman Dana Perino said it’s “too early to say” whether their assessment was correct.
Obama, pointing out that there is only one president at a time, said earlier in the week that the Big Three had “a more serious set of plans” than they did the last time their chiefs testified in front of Congress.
That drew a double-barreled barb from Rep. Barney Frank, D-Mass. chairman of the House Financial Services Committee.
“He’s going to have to be more assertive than he’s been,” Frank said of the president-elect. “At a time of great crisis with mortgage foreclosures and autos, he says we only have one president at a time. I’m afraid that overstates the number of presidents we have. He’s got to remedy that situation.”
The leading Democrats in Congress, Pelosi and Senate Majority Leader Harry Reid put it this way several days ago in a letter to the Detroit carmakers. “The auto companies’ shareholders, business partners and prospective benefactors — the American people — deserve to see a plan that is accountable to taxpayers and that is viable for the long-term.”
The new plans in hand, Sen. Bob Bennett, R-Utah, observed: “to come up with the answer to those complicated questions (in) 72 hours, is something that Congress is frankly not equipped to do.”
Whatever the financial and economic issues, the political knot is a complicated one.
The administration says federal law does not permit the use of any of the $700 billion financial bailout fund to help the auto industry. Instead, aides say President George W. Bush would sign legislation that makes use of $25 billion originally slotted for loans to help the carmakers retool their factories to make environmentally friendlier products.
Pelosi and Reid counter that the Treasury has clear authority to tap the bailout funds if the president chose.
Additionally, Pelosi, allied with environmentalists, opposes the use of the money the administration favors, saying it is already spoken for.
Reid agrees that the administration can and should tap the bailout money, and seems more amenable than the speaker to making use of the funds that Bush has proposed tapping.
Senate Republicans currently control 49 seats and generally support Bush’s point of view, it also appears at present to be the only way for a bailout to pass.
Republicans and Democrats alike, speaking on condition of anonymity, agree that in refusing thus far to compromise, all sides are betting that General Motors and Chrysler, in particular, will survive into the new year.
On Jan. 20, the Bush administration will pass into history, and Democrats will have larger majorities in both houses of Congress than is now the case — and complete responsibility for the fate of auto industry legislation.
Especially, consider Reid’s perspective.
Nearly half of the $700 billion bailout fund has been committed, and helping Detroit almost certainly would require tapping into the second half of the fund — a step that requires a vote in Congress.
Inconveniently, perhaps, Reid will be looking out at five new Democratic senators who opposed the bailout when it cleared Congress last fall.
___
EDITOR’S NOTE — David Espo is AP’s chief congressional correspondent.
Copyright 2008 The Associated Press.
Health care, defense poised to weather recession
Date: 11/1/2008 11:11 PM
By MATTHEW PERRONE
AP Business Writer
WASHINGTON (AP) _ With the global economy at risk of a deep recession, many battered areas of the U.S. economy stand to suffer more damage in coming months. Other industries, though, seem poised to withstand even a severe downturn.
The health care sector should hold up especially well even in a recession, along with defense and a few other industries. Still, analysts say a unique collision of economic and political challenges means many businesses might not be as well-insulated as they were in past recessions. Here’s a look at major industries that, if not exactly recession-proof, seem best able to endure the downturn:
—Health care
With an aging population and the largest health care spending in the world, the U.S. medical sector could fare perhaps best of all. During economic downturns, sales of prescription drugs and medical devices tend to hold up better than nonessential goods, noted David Wyss, chief economist of Standard and Poor’s.
“Generally, you’re looking for things that are necessities, not luxuries,” Wyss said. “People get sick and need medical care regardless of the state of the economy.”
But recent earnings show that drug makers are not immune from slumping sales that have plagued their peers in the retail and auto industries. Pfizer said last month that U.S. sales of its best-selling product, the cholesterol drug Lipitor, fell 13 percent in the last quarter as some financially struggling patients stopped filling their prescriptions.
“The typical safe harbors (for investors) have been pharmaceuticals,” said analyst Steve Brozak of WBB Securities. “They’re no longer safe; they’re now the least bad choice.”
Pfizer and Schering-Plough Corp. were able to offset weak revenue in the U.S. with higher sales abroad. But other companies, such as Merck & Co. Inc., have been less successful. Merck said recently it will cut 7,200 jobs after reporting sales declines.
Experts say pharmaceuticals are more vulnerable to economic cycles because employers have shifted more of the financial burden for paying for medications to patients.
“With consumers having more cost-sharing in their benefits, you’re going to see a greater effect on their health care spending right away,” said Paul Ginsburg, president of the nonprofit Center for Studying Health System Change.
The lagging economy and rising unemployment have made it harder for health insurers such as UnitedHealth Group Inc. and Humana Inc. to raise prices to offset higher costs and investment losses.
Health care companies least affected are those that sell inexpensive medical products directly to hospitals, bypassing cash-strapped consumers.
Becton, Dickinson & Co. and Baxter International Inc., for example, reported sharp profit gains for the most recent quarter and boosted their full-year earnings estimates. Becton Dickinson specializes in syringes and surgical tools; Baxter sells drugs to treat blood and immune disorders.
“The products they offer aren’t high-tech things,” said Aaron Vaughn, an analyst with Edward Jones. “They are health care staples that people need.”
A focus on lifesaving medicine is also expected to reward makers of high-priced biotechnology drugs. Genzyme Corp. and Celgene Corp., for example, have built businesses around niche drugs for life-threatening diseases. Health care investment firm Leerink Swann gives both companies an “outperform” rating, along with peers Amgen Inc., Biogen Idec Inc. and Gilead Sciences Inc.
—Defense
With the government spending hundreds of billions of dollars to fight wars in Iraq and Afghanistan, most big defense-related companies should also be able to withstand recessionary pressures.
Military spending has soared about 40 percent during the Bush administration, pushing up the stocks of General Dynamics Corp. and its competitors. The company’s chief executive, Nicholas Chabraja, has pointed to General Dynamic’s backlog of orders — totaling $60.5 billion at the end of the quarter — as a sign of the company’s long-term strength.
Rivals such as Northrop Grumman Corp. and Lockheed Martin Corp. also have contracts that stretch decades into the future, as well as large cash reserves.
Analysts caution, though, that long-term problems loom for the sector. Both presidential candidates have called for reforms on how defense contracts are awarded, and many analysts see the government’s $700 billion bailout plan as a crimp on future spending.
It seems “nearly impossible” that future military budgets “will remain unscathed by the current fiscal reality,” Ronald Epstein, a Merrill Lynch analyst, wrote in a recent note.
JSA Research analyst Paul Nisbet said that even a partial withdrawal from Iraq would hurt ammunition manufacturers such as Alliant Techsystems Inc. and General Dynamics. Democratic candidate Barack Obama has also expressed skepticism about the level of spending on missile defense — a revenue generator for Raytheon Co. and Boeing Co.
By contrast, Nisbet said companies such as Boeing and Goodrich Corp. are better positioned to weather defense cuts because much of their business involves the private aviation market.
—Food and consumer staples
While health insurers and defense contractors are subject to policy changes in Washington, other sectors are more stable. Food companies such as Kraft Foods Inc. and Kellogg Co. tend to perform fairly consistently, even during tough times, which is why their stocks are holding up well, analysts say.
General Mills, maker of Cheerios and Pillsbury products, is one of the best-performing stocks in the S&P; 500. Its strong brands have helped it outperform competitors for years.
As consumers begin eating at home more often, they are boosting sales at chains such as BJ’s Wholesale Club Inc. that can deliver groceries at the lowest price, often at the expense of more high-end companies. Shares of Whole Foods Market Inc. have lost three-quarters of their value this year as the organic-food retailer lowered its outlook and suspended its quarterly dividend indefinitely.
At the same time, chains such as Costco Wholesale Corp. and Kroger Co. have reported rising earnings as shoppers trade down to lower-budget store brands.
—Tobacco and alcohol
Beer and cigarettes do not seem as indispensable as food and medicine, but demand for tobacco and alcohol tends to remain strong in tough economic times.
Last month, Philip Morris International Inc. and Reynolds American Inc. reported results that topped Wall Street expectations. Executives said steady sales show consumers remain loyal to tobacco products even as they cut back on other expenses.
“No business in the world is actually recession-proof, but I am convinced that our business is very recession-resilient,” said Hermann Waldemer, chief financial officer of Philip Morris.
The company, which reported it had $1 billion more in cash than short-term debt in June, said it generates more than $10 billion in operating cash per year.
The beer industry has proved nearly as elastic. Its sales to retailers have risen about half a percent for the year, according to trade publication Beer Marketer’s Insights. Though that’s down from last year’s 1.4 percent growth rate, analysts say the business is still performing relatively well.
“Vices tend to be a good place to seek shelter because people pretty much support their vices — at least the cheaper ones,” said S&P;’s Wynn.
___
AP Business Writers Stephen Manning in Washington, Emily Fredix in Milwaukee and Vinnee Tong in New York contributed to this report.
Copyright 2008 The Associated Press.
By MATTHEW PERRONE
AP Business Writer
WASHINGTON (AP) _ With the global economy at risk of a deep recession, many battered areas of the U.S. economy stand to suffer more damage in coming months. Other industries, though, seem poised to withstand even a severe downturn.
The health care sector should hold up especially well even in a recession, along with defense and a few other industries. Still, analysts say a unique collision of economic and political challenges means many businesses might not be as well-insulated as they were in past recessions. Here’s a look at major industries that, if not exactly recession-proof, seem best able to endure the downturn:
—Health care
With an aging population and the largest health care spending in the world, the U.S. medical sector could fare perhaps best of all. During economic downturns, sales of prescription drugs and medical devices tend to hold up better than nonessential goods, noted David Wyss, chief economist of Standard and Poor’s.
“Generally, you’re looking for things that are necessities, not luxuries,” Wyss said. “People get sick and need medical care regardless of the state of the economy.”
But recent earnings show that drug makers are not immune from slumping sales that have plagued their peers in the retail and auto industries. Pfizer said last month that U.S. sales of its best-selling product, the cholesterol drug Lipitor, fell 13 percent in the last quarter as some financially struggling patients stopped filling their prescriptions.
“The typical safe harbors (for investors) have been pharmaceuticals,” said analyst Steve Brozak of WBB Securities. “They’re no longer safe; they’re now the least bad choice.”
Pfizer and Schering-Plough Corp. were able to offset weak revenue in the U.S. with higher sales abroad. But other companies, such as Merck & Co. Inc., have been less successful. Merck said recently it will cut 7,200 jobs after reporting sales declines.
Experts say pharmaceuticals are more vulnerable to economic cycles because employers have shifted more of the financial burden for paying for medications to patients.
“With consumers having more cost-sharing in their benefits, you’re going to see a greater effect on their health care spending right away,” said Paul Ginsburg, president of the nonprofit Center for Studying Health System Change.
The lagging economy and rising unemployment have made it harder for health insurers such as UnitedHealth Group Inc. and Humana Inc. to raise prices to offset higher costs and investment losses.
Health care companies least affected are those that sell inexpensive medical products directly to hospitals, bypassing cash-strapped consumers.
Becton, Dickinson & Co. and Baxter International Inc., for example, reported sharp profit gains for the most recent quarter and boosted their full-year earnings estimates. Becton Dickinson specializes in syringes and surgical tools; Baxter sells drugs to treat blood and immune disorders.
“The products they offer aren’t high-tech things,” said Aaron Vaughn, an analyst with Edward Jones. “They are health care staples that people need.”
A focus on lifesaving medicine is also expected to reward makers of high-priced biotechnology drugs. Genzyme Corp. and Celgene Corp., for example, have built businesses around niche drugs for life-threatening diseases. Health care investment firm Leerink Swann gives both companies an “outperform” rating, along with peers Amgen Inc., Biogen Idec Inc. and Gilead Sciences Inc.
—Defense
With the government spending hundreds of billions of dollars to fight wars in Iraq and Afghanistan, most big defense-related companies should also be able to withstand recessionary pressures.
Military spending has soared about 40 percent during the Bush administration, pushing up the stocks of General Dynamics Corp. and its competitors. The company’s chief executive, Nicholas Chabraja, has pointed to General Dynamic’s backlog of orders — totaling $60.5 billion at the end of the quarter — as a sign of the company’s long-term strength.
Rivals such as Northrop Grumman Corp. and Lockheed Martin Corp. also have contracts that stretch decades into the future, as well as large cash reserves.
Analysts caution, though, that long-term problems loom for the sector. Both presidential candidates have called for reforms on how defense contracts are awarded, and many analysts see the government’s $700 billion bailout plan as a crimp on future spending.
It seems “nearly impossible” that future military budgets “will remain unscathed by the current fiscal reality,” Ronald Epstein, a Merrill Lynch analyst, wrote in a recent note.
JSA Research analyst Paul Nisbet said that even a partial withdrawal from Iraq would hurt ammunition manufacturers such as Alliant Techsystems Inc. and General Dynamics. Democratic candidate Barack Obama has also expressed skepticism about the level of spending on missile defense — a revenue generator for Raytheon Co. and Boeing Co.
By contrast, Nisbet said companies such as Boeing and Goodrich Corp. are better positioned to weather defense cuts because much of their business involves the private aviation market.
—Food and consumer staples
While health insurers and defense contractors are subject to policy changes in Washington, other sectors are more stable. Food companies such as Kraft Foods Inc. and Kellogg Co. tend to perform fairly consistently, even during tough times, which is why their stocks are holding up well, analysts say.
General Mills, maker of Cheerios and Pillsbury products, is one of the best-performing stocks in the S&P; 500. Its strong brands have helped it outperform competitors for years.
As consumers begin eating at home more often, they are boosting sales at chains such as BJ’s Wholesale Club Inc. that can deliver groceries at the lowest price, often at the expense of more high-end companies. Shares of Whole Foods Market Inc. have lost three-quarters of their value this year as the organic-food retailer lowered its outlook and suspended its quarterly dividend indefinitely.
At the same time, chains such as Costco Wholesale Corp. and Kroger Co. have reported rising earnings as shoppers trade down to lower-budget store brands.
—Tobacco and alcohol
Beer and cigarettes do not seem as indispensable as food and medicine, but demand for tobacco and alcohol tends to remain strong in tough economic times.
Last month, Philip Morris International Inc. and Reynolds American Inc. reported results that topped Wall Street expectations. Executives said steady sales show consumers remain loyal to tobacco products even as they cut back on other expenses.
“No business in the world is actually recession-proof, but I am convinced that our business is very recession-resilient,” said Hermann Waldemer, chief financial officer of Philip Morris.
The company, which reported it had $1 billion more in cash than short-term debt in June, said it generates more than $10 billion in operating cash per year.
The beer industry has proved nearly as elastic. Its sales to retailers have risen about half a percent for the year, according to trade publication Beer Marketer’s Insights. Though that’s down from last year’s 1.4 percent growth rate, analysts say the business is still performing relatively well.
“Vices tend to be a good place to seek shelter because people pretty much support their vices — at least the cheaper ones,” said S&P;’s Wynn.
___
AP Business Writers Stephen Manning in Washington, Emily Fredix in Milwaukee and Vinnee Tong in New York contributed to this report.
Copyright 2008 The Associated Press.
Market’s latest lurch down raises new uncertainty
Date: 10/24/2008 5:22 PM
By DAVE CARPENTER
AP Business Writer
CHICAGO (AP) _ The advice from financial experts has been painfully repetitive during weeks of decline in the markets: A bottom should be near. History says stocks always bounce back. Don’t sell now and miss the recovery.
But when panic selling washed over the markets again Friday, sending the Dow Jones industrial average down as much as 6 percent at one point, the pundits and money managers sounded less certain than ever about what comes next.
“There’s a debate right now, is the next major milestone in the Dow 5,000 or 10,000,” said Art Hogan, chief market strategist at Jefferies & Co. “I think compelling arguments can be made on both sides.”
Many financial professionals, Hogan included, think the bad news is largely reflected in current stock prices: a global economic slowdown, a residential real estate recession, the credit market crunch and poor corporate earnings.
It already seemed that way when the Dow Jones industrial average plummeted 27 percent in the first eight trading days of this month to a 5½-year low of 7,882 during the session on Oct. 10.
But investor emotions remain a wild card in a shaky global economy. After climbing back near the 10,000 mark briefly last week, the Dow is sliding again and finished down 4 percent Friday at 8,379. As the market opened, the potential loss was feared to be much greater after some international markets were hammered by double-digit declines.
U.S. market analysts were at as much of a loss to estimate how much further the descent might go as they were to explain the latest drop.
“It just is something we haven’t seen in our lifetimes, so it’s hard to tell exactly where we are,” said Tom Forester, portfolio manager for the Forester Value Fund in Chicago.
“This seems more like panic selling than fundamentally based,” he said. But if the financial system remains troubled and every-day loans are tougher to get, he said, “then who knows? Maybe panic’s the right move.”
Investors’ fear is in evidence not just in the markets but in the faces of those who have lost tens or hundreds of thousands of dollars in their retirement and other accounts this fall.
“Anxiety is running overtime,” according to Dr. Stephan Quentzel, chief of primary care psychiatry at Beth Israel Medical Center in New York.
The steady stock decline makes people feel more emotionally vulnerable and increasingly prone to bad market moves — usually ill-timed decisions to sell — to try to regain a sense of financial security, he said.
The tension shows in other forms, too.
Across from the New York Stock Exchange, artist Geoffrey Raymond set up a giant canvas Friday featuring the face of former Federal Reserve Chairman Alan Greenspan and invited passers-by to write their own messages on the painting.
One person wrote simply, “Greenspan is the devil.” Another wrote: “When things go too well, someone should get nervous.” Still another: “You’ve got to know when to fold.”
Steve Martin, a 55-year-old systems analyst standing nearby, said he has been too afraid to check his retirement savings balance during the crisis. He has his suspicions, though: “The 401(k)’s almost gone.”
That’s still not enough to make him consider shifting out of stocks, with his portfolio already down so heavily.
“I think I kind of missed that opportunity,” he said. “I figure at this point I’m just going to ride it out.”
Many experts continue to say holding on may be the best strategy left available.
When clients of Piedmont Investment Advisors have asked about shifting their funds from stocks to cash during the tumult, the Durham, N.C., managers at the firm have asked clients to remain calm, according to Dawn Alston Page, executive vice president and director of research.
“We’re pretty much of a mind that any broad-scale move to cash is much too late in the game,” she said. “You should definitely look forward to the future and look more for opportunities at this point.”
Morningstar Inc.’s director of personal finance, Christine Benz, also is among those advocating hanging in there, if not considering buying.
“I can’t say whether it’s the bottom or whether we’re even near the bottom,” she said. “But when it’s the bottom, there won’t be flashing lights and someone with a bullhorn saying it’s time to buy.”
Investors risk being caught off guard by a market rebound when they sit on cash investments. That’s because it takes time to reposition the money and get back in the market, and it’s easy to miss some of the market’s biggest days.
A lot of smart money is increasingly betting on a turnaround, and not just Warren Buffett, who has invested billions in the market in the past month.
“Some of the best (mutual fund) managers are saying they’re finding an awful lot to buy right now,” said Morningstar’s Benz.
The buying is being done by those with patience and a long-term view, since few have any confidence that the bottom has been reached as the world enters what many think will be a particularly painful recession.
“We’re not out saying this is the buy (market) of the century,” said Francis Kinniry, a principal in Vanguard Group’s investment strategy group. “But no matter what metric you use, even if we enter into a deep and long recession, the valuations still look much more favorable than they have certainly at any time in the last 12 to 18 months.”
Julie Murphy Casserly, a certified financial planner and president of JMC Wealth Management in Chicago, sees most of what’s going on in the market this month as fear-based, since stocks are trading for barely what their companies are worth in cash.
“We just have to let people’s fear shake out and let people start to get their footing underneath them,” said Casserly, author of The Emotion Behind Money. “I think we will have a little bit more of this volatile market because people are not there yet.”
___
Associated Press reporter Samantha Gross in New York contributed to this report.
Copyright 2008 The Associated Press.