The Mediterranean economy
Club Med
The Mediterranean, north and south, is forming a single economic unit: Europe should make it a powerful one
UNDER imperial Rome, the roads in cold, wet Britannia were no straighter than those in sweltering north Africa. The same sestertius could buy a lampful of oil. Across the southern Mediterranean and northern Europe alike, Latin was the lingua franca—1,500 years before anyone had coined the term. Under the Treaty of Rome, however, the European Union has behaved as if the Med were a frontier, rather than an organising principle. As often as not, it has turned its back on the crescent that stretches from Morocco to Turkey, as a cradle of instability and terrorism. Sometimes the southern Med’s main export has seemed to be boatloads of illegal immigrants.
This weekend at a summit in Paris France’s president, Nicolas Sarkozy, wants to heal the rift. Some 40 heads of state and government from the EU and the southern and eastern Mediterranean will meet to create a new club, called the Union for the Mediterranean. Despite Mr Sarkozy’s bombast, Club Med will have a modest start: the French propose a secretariat, which they will jointly head with Egypt, and money to help finance ventures on solar energy, anti-terrorism and the inevitable cultural exchanges.
Beyond the platitudes and projects lies the germ of a brilliant idea. Something is stirring around the Med as globalisation takes root. Growth and investment have leapt. There is a new openness to trade and foreign money. The members of Club Med no longer need to glower across the table at each other. Instead, there is the prospect of the youth and vigour of the southern Mediterranean combining with a rich, ageing north. Despite the recent surge, the southern Med still takes less than 10% of all the FDI from the EU. This offers a tantalising prospect—though one reason why Club Med matters is that it is fraught with dangers.
Dido’s cement
The EU has looked south before, in an initiative called the Barcelona Process, which dates back 13 years and failed to live up to its promises. Hopes are higher today, however, because the politicians gathering in Paris are following a path that is increasingly well trodden by business (see article). FDI in the countries along the Mediterranean shore, from Morocco to Turkey, has grown six times since the turn of the century, to $59 billion in 2006—ahead of Latin America’s Mercosur ($25 billion) and not far short of China ($69 billion). At the same time, the growth in the region’s GDP is running at 4.4% a year—slow by China’s standards, admittedly, but it has been accelerating as Europe has slowed.
Although Turkey, Israel and Egypt still dominate, most of the region has shared in this prosperity. Oil and gas are partly to thank, but investment is spread among financial services, telecoms, retailing and construction. Look at the car factory Renault and Nissan are planning in Morocco. Or the new container port outside Tangiers that will soon be bigger than Long Beach, on America’s west coast. Much of the money comes from Europe, as did the €8.8 billion ($12.9 billion) France’s Lafarge invested in Egyptian cement. But Americans are making aerospace parts; Arabs are spending petrodollars on property and construction; Brazilians are investing in fertilisers and textiles; Indians in IT and pharmaceuticals.
There is strength in such diversity, and there needs to be. The resurgent Med has a lot still to overcome. With exceptions, notably Israel, the region is plagued by poor infrastructure, an ill-educated workforce and unemployment. Unlike eastern Europe, which built trading links under communism, the Med countries barely trade with each other, so they lose the benefits of specialisation. And then there is the politics. The Europeans are right to look askance at the looming crisis of succession in Egypt, beleaguered Israel, unborn Palestine, divided Lebanon, fundamentalist Islam in Morocco, bombs in Algeria, Muammar Qaddafi’s bizarre Libyan autocracy, the risk that the Turkish courts declare the ruling party unconstitutional. That unfinished list is already depressingly long.
The EU is not free of troubles either. Those who favour Turkey’s membership of the EU fear that Club Med is designed to fob it off with second-class citizenship. At first Mr Sarkozy schemed to include only the EU countries with a Mediterranean coast—a ploy to create a French-dominated counterbalance to the apparently German-dominated east. After a vicious row with Angela Merkel, Germany’s chancellor, Mr Sarkozy agreed to include the entire EU. That was right, if only because Germany pays much of the EU’s bills.
Sunday’s summit matters, because it is a step towards healing such wounds—and because it sets the tone. Will the Mediterranean union seize the moment, or will it be strangled by southern politics and European squabbles?
Mare nostrums
The first test is whether Mr Sarkozy is willing to see Club Med as more than a scheme to burnish French glory. If he wants the new union to thrive, he will have to accept that it is for everyone’s benefit, and let business do its work. This means a free-trade area that opens the EU to goods and services from the south—including the farm produce that France is making a fuss over in the world trade talks.
The second is for the EU to use its patronage to boost spending on infrastructure, promote trade in the region and clean up politics. One lesson from eastern Europe is that, with incentives, countries will start to sort themselves out. For the Mediterranean, those incentives should include access to funds and markets. The logic of enlargement is that it could even include the faint possibility of membership of the EU itself (if the union were to admit non-Europeans). But none of that will count for much unless the southern Med chooses prosperity.
The world sometimes writes off Europe as the old continent, well past the vigour of youth and doomed to gentle decline; at the same time it condemns many of the teeming economies of the southern Med as chaotic backwaters. Old and young can make a powerful combination. The creation of the Union for the Mediterranean is hardly the rebirth of imperial Rome, but it may just be the start of something exciting.
American politics
Of race and the race
Latinos look politically valuable this year, while some blacks feel taken for granted
THE feeling of being taken for granted by Democrats is not new for black Americans. Al Sharpton, a jocular preacher and former presidential candidate, once described how blacks chose the Democratic Party. Republicans promised freed slaves “40 acres and a mule” after the civil war, but they failed to deliver, so blacks decided to “ride this donkey”—the Democratic symbol—“as far as it would take us”. With the introduction of civil-rights legislation in the 1960s black voters swung behind the Democrats in earnest. But some complain that Democrats now take their votes without delivering, or even that white Democrats take advantage of the all-but-guaranteed black support. Bill Clinton did so in his “Sister Souljah” moment in 1992, when he criticised a black rapper’s anti-white statements, to the delight of white conservatives.
That history is particularly relevant ahead of speeches by both presidential candidates to the National Association for the Advancement of Coloured People (NAACP) next week. Jesse Jackson, a once-iconic civil-rights leader, witnessed Mr Clinton’s original Sister Souljah moment. Now he is at the centre of another fuss. On Wednesday July 9th, not realising that a microphone was on, he complained about the Democratic candidate, Barack Obama, saying that “Barack’s been talking down to black people…I want to cut his nuts off.” He was evidently troubled by Mr Obama’s recent criticism of black men who abandon their children.
Mr Jackson has since apologised, and reiterated his “wide, deep and unequivocal” support for Mr Obama. But he still feels he has a point, saying: “My appeal was for the moral content of his message to not only deal with the personal and moral responsibility of black males, but to deal with the collective moral responsibility of government and the public policy which would be a corrective action for the lack of good choices that often led to their irresponsibility.”
Mr Obama, though, is in a lucky position regarding black voters. Their early scepticism has given way to massive support. He is in the enviable position of being able to lob the occasional criticism at black pathologies to win white votes. Sensing this, and thus his own declining ability to wield grievance to win concessions, Mr Jackson had some reason to be annoyed.
If black communal influence has waned, it seems that of Latinos is rising. Both candidates wooed them this week with speeches to LULAC (a Latino equivalent to the NAACP). Over the weekend both will speak to a more strident group, La Raza. Latinos are now America’s largest minority. George Bush courted them, with pidgin Spanish, a promised focus on Latin America, and reforms that would offer many illegal immigrants a path to become legal. He won more of their votes than the typical Republican. But immigration reform failed, Mr Bush neglected Latin America and the Republicans’ anti-immigration stance, which sometimes carries a whiff of racism, are all driving Latinos to Mr Obama.
This is surprising, as Mr Obama lost Latinos to Hillary Clinton in the primaries. John McCain has made a decent effort to reach out to them. He records adverts in Spanish, and earlier championed Mr Bush’s idea of giving papers to illegals (earning the moniker “Juan ‘Amnesty’ McCain” from the uglier wing of his party). But he now says that he would not vote for the immigration bill that he previously helped to draw up, saying the border must be “fixed” first. One poll showed Mr Obama ahead by 25 percentage points among Latinos, but with a large number (26%) undecided.
This matters. Mr Obama has made inroads into the previously Republican interior West, Mr McCain’s home region. He leads in Colorado and New Mexico, and has a shot in Nevada, which all have big Hispanic populations. If he were to win these states he would have every chance of winning the election over all. Mr McCain leads in Florida, whose more traditional Cuban-American voters back his steadfast anti-Castro, pro-embargo stance over Mr Obama’s flexibility.
Blacks, for their part, tend to be inconveniently located either in deep-south states that Mr Obama cannot win, or in places that he is already likely to take. In any case, a few critical comments are unlikely to stop their backing him. Mr Jackson should not be surprised to see Mr Obama courting swing groups that he needs.
July 11 (Bloomberg) -- The U.S. trade deficit unexpectedly narrowed in May as the cheaper dollar spurred gains in exports, helping make up for the soaring cost of imported oil.
The gap between imports and exports shrank 1.2 percent to $59.8 billion from a revised $60.5 billion in April that was smaller than previously estimated, the Commerce Department said today in Washington.
Growth in overseas markets and a weaker dollar are helping lift exports even as oil prices, which reached a record last week, are pushing up imports. A shrinking trade gap is one of the few economic bright spots remaining as an extended housing slump and cooling consumer spending weigh on the economy.
``We're continuing to see that in foreign demand,'' boosted by a sinking U.S. currency, said Mike Feroli, an economist at JPMorgan Chase & Co. in New York. ``It looks like we'll get yet another quarter where foreign trade will contribute around a percentage point'' to gross domestic product growth, he said.
A separate government report today showed prices of imported goods rose 2.6 percent in June from the previous month, the same as in May. The Labor Department said import prices climbed 20.5 percent from a year before.
Economists' Estimates
The trade gap was forecast to widen to $62.5 billion from an initially reported $60.9 billion in April, according to the median estimate in a Bloomberg News survey of 74 economists. Deficit projections ranged from $59.5 billion to $65 billion.
Exports increased 0.9 percent to $157.5 billion, as sales of foods, aircraft and chemicals strengthened.
Imports rose 0.3 percent to $217.3 billion after increasing 4.6 percent the prior month. The import figures reflected a record $31.2 billion in purchases of foreign crude oil, before seasonal adjustments, as well as higher demand for capital goods and consumer items such as televisions, apparel and toys. Auto imports fell $842 million to $20.6 billion.
The cost of crude oil rose as high as $135.09 a barrel on May 22, according to pricing on the New York Mercantile Exchange, and last week reached a new record of $145.85.
Imports of industrial supplies declined by $332 million to $67.2 billion. Demand for consumer goods from abroad gained $1.5 billion to $41.7 billion.
After eliminating the influence of changes in prices, the trade deficit declined to $43.6 billion, the lowest since October 2002, from $46.7 billion. Those are the numbers used to calculate gross domestic product and may prompt economists to increase their estimates of second-quarter growth.
China Deficit Widens
The trade gap with China widened to $21 billion from $20.2 billion in the prior month. The deficit with the Organization of Petroleum Exporting Countries widened by $2.3 billion to a record $17.9 billion.
The U.S. trade deficits with Canada, Mexico, Japan and the European Union all narrowed, led by a $2.5 billion decline in the shortfall with Japan, to $5 billion. Exports to Canada and the EU reached record levels.
The economy probably grew 1.5 percent in the second quarter, as growing exports helped counter weakness in manufacturing and construction, according to a Bloomberg survey of economists taken the first week of July. The economy grew 1 percent in the first quarter, when net exports contributed 0.8 percentage point to the expansion.
About $78 billion in tax rebates through June probably gave consumer spending a boost in the second quarter, helping to spur purchases of foreign televisions and other consumer goods. Economists surveyed by Bloomberg forecast consumer spending rose 2 percent in the April-to-June period, compared with a 1.1 percent gain in the first quarter.
Growth Overseas
Faster growth overseas is spurring exports of U.S.-made goods, ranging from Boeing Co. aircraft, to mining and construction equipment, steel and grains. China's economy grew 10.6 percent in the first quarter from a year earlier. India's expanded 8.8 percent, Argentina's 8.4 percent and Brazil's 5.8 percent.
In response to growing demand from China, Caterpillar Inc., the world's biggest maker of earthmoving equipment, will build a factory in eastern China to make light hydraulic excavators for the world's largest earthmover market after the U.S.
``Our customers in China are demanding a greater variety of construction equipment,'' Mary Bell, Caterpillar's global vice president for construction machines, said in a statement June 30.
The deficit with China, which makes up the largest share of the U.S. trade gap, remains a political sticking point. Some U.S. lawmakers accuse China of keeping its currency undervalued to boost exports.
Treasury Secretary Henry Paulson on June 18 urged China to let markets play a bigger role in setting the value of the yuan, while acknowledging ``the recent increased pace of appreciation'' of the Chinese currency.
Dollar's Decline
U.S. exporters are also getting a boost from a weaker dollar, which was down 8 percent against a trade-weighted basket of currencies of major trading partners in the 12 months ended in May. The dollar is down by about 27 percent since February 2002, and that has pushed up prices of commodities.
Charlotte, North Carolina-based Nucor Corp., the largest U.S.-based steelmaker by market value, is working to keep up with surging demand from emerging economies, many of them profiting from gains in prices of oil and other commodities, Chief Executive Officer Dan DiMicco said on June 25.
``Because of the global shortage of steel, we have a strong ability to export,'' DiMicco said in an interview in New York. Demand for steel and other commodities is in a ``30-plus-year bull market,'' he said, as emerging economies including China and India expand infrastructure.
July 11 (Bloomberg) -- John McCain and Barack Obama agree the Latino vote will be pivotal in a close presidential election and both know their disadvantages, with McCain tied to an unpopular party and Obama losing such voters overwhelmingly in the Democratic primaries.
Both see a path to winning Latinos by talking up their biographies and records. Those strategies will be on display in coming days as they speak in San Diego to the National Council of La Raza, the largest U.S. Latino civil rights and advocacy organization, after recent dueling appearances in Washington.
The presumptive presidential nominees are highlighting their differences on economic issues before Hispanic groups. In a speech last month, Democrat Obama, 46, pinned the sagging economy on President George W. Bush's policies and said a McCain presidency would be equivalent to a third Bush term. He emphasized the inequalities in Hispanics' access to health care and education, and evoked his experience as a black American.
``Washington has not been working for ordinary Americans,'' the Illinois senator told the National Association of Latino Elected and Appointed Officials on June 28. ``Few have been hit harder than Latinos and African-Americans.''
The following week, Arizona Senator McCain said he had the better prescription for the economy: helping small businesses and keeping taxes low. ``If you believe you should pay more taxes, I'm the wrong candidate for you,'' he told the League of United Latin American Citizens, known as LULAC, on July 8.
Bush's Share
The Republican is aiming for the 40 percent of the Hispanic vote that helped Bush win re-election in 2004; Obama is trying to capture the 70 percent who sided with his Democrats in the 2006 congressional elections after a divisive debate over immigration.
The 10 percent of the Latino vote in contention could be crucial in states including Nevada, Colorado, Florida, and Ohio. Obama told LULAC that the 2004 Democratic nominee, John Kerry, lost by less than 6,000 votes in New Mexico, where 44 percent of the population is Hispanic and many are unregistered.
Nationwide, Hispanics have the second-lowest voter registration rate and the lowest voting rate among ethnic groups, according to U.S. Census data. Obama's campaign held organizing meetings at recent Latino gatherings and is undertaking a massive voter-registration drive.
`Powerful Community'
``I know how powerful a community you are,'' Obama said on July 8. ``I also know how powerful you could be on Nov. 4 if you translate your numbers into votes.''
In his 2004 Senate race, McCain won 70 percent of the Latino vote, a higher share than his party did overall. This year, however, he faces a widening disaffection among those voters nationally: at the end of 2007, 57 percent of Hispanic voters said they were Democrats; 23 percent sided with Republicans, according to the Washington-based Pew Hispanic Center. The gap -- now 34 percentage points -- was 21 points in July 2006.
McCain, who championed border security during the Republican primaries, now at times plays up his support for a path to citizenship for illegal immigrants, a position that draws fire from many in his party.
``We must also understand that there are 12 million people who are here, and they're here illegally and they are God's children,'' he said on June 28.
Social Issues
McCain, 71, rarely mentions social issues even though his opposition to abortion and support for gun rights may strike a chord among many in the predominantly Catholic Latino community. Hispanics, who serve in the armed forces in high numbers, may also be drawn by his frequent mentions of his service as a U.S. Navy pilot.
The anecdotes used by Obama and McCain demonstrate their different strategies.
Obama tells a story about a little girl he met at a naturalization workshop who translated his words to her non English-speaking parents. He uses the moment to showcase his own biography as the son of a Kenyan father.
``America has nothing to fear from our newcomers,'' he said. ``They have come here for the same reason that families have always come here, for the same reason my own father came here.''
For his part, McCain talks about Everett Alvarez, ``a brave American of Mexican descent,'' who was a fellow prisoner of war in Vietnam. McCain said he rejected a chance to be released ahead of Alvarez and others because doing so ``would have shamed us.''
Latinos favored Democrat Hillary Clinton by a margin of about 2 to 1 over Obama in the primaries, raising questions about whether his race hurt him with those voters. Yet community leaders say many Latinos backed Clinton because of their history with her and her husband, former President Bill Clinton.
Eduardo Pena, a past national president of LULAC, said Obama and McCain need to keep making their cases to Latino voters in forums such as LULAC and La Raza, where the two candidates will speak on July 13 and 14.
``It's going to take this kind of thing'' Pena said after listening to the two candidates speak to LULAC on July 8. ``I was a Clinton supporter. We're very comfortable with Hillary.''
July 11 (Bloomberg) -- Crude oil rose more than $5 a barrel to a record and gasoline jumped to an all-time high on concern that Israel may be preparing to attack Iran, while plans for a strike in Brazil threaten to curtail supplies.
Oil jumped as high as $147.27 a barrel in New York after the Jerusalem Post said Israeli war planes practiced over Iraq. Israeli government spokesman Mark Regev denied the report. A Brazilian oil workers union is planning a five-day strike. Prices have jumped more than $10 a barrel since July 9.
``The Iran premium has come into the market over the last two days,'' said Adam Sieminski, Deutsche Bank's chief energy economist, in Washington. ``Nothing has changed except the perception about whether there will be a deal between the U.S. and Iran. The possibility of a conflict is of tremendous concern to the market.''
Crude oil for August delivery rose $4.73, or 3.3 percent, to $146.38 a barrel at 10:06 a.m. on the New York Mercantile Exchange. Futures have more than doubled over the past year.
The gain in prices has triggered computer-generated buying programs. Futures tumbled 6.4 percent on July 7 and 8, the biggest two-session decline since March.
``We had a nice correction earlier this week, found support in the $133-to-$135 level, held there for a short while and then took off,'' said Tom Bentz, a broker at BNP Paribas in New York. ``With all the programmed buying, the market can take off in a heartbeat. The market has become more technical than ever because of the electronic trading programs.''
Electronic Trading
Nymex contracts trade electronically on the Chicago Mercantile Exchange's Globex trading system almost 24 hours a day under a deal reached between the exchanges in 2006. Floor trading has declined in importance since the agreement was reached.
``A total of 90.8 percent of Nymex trading of crude oil, gasoline, heating and natural gas occurred on Globex last month compared with 80 percent a year earlier,'' said Tim Evans an energy analyst for Citi Futures Perspective in New York. ``In September 2006, when trading went side-by-side, we were looking at just 26 percent occurring on Globex.''
Gasoline for August delivery rose 10.46 cents, or 3 percent, to $3.6155 a gallon in New York. Futures reached $3.631 a gallon today, an all-time high.
Regular gasoline, averaged nationwide, fell 0.8 cent to $4.096 a gallon, AAA, the nation's largest motorist organization, said today on its Web site. Pump prices reached a record $4.108 a gallon on July 7.
Israeli Maneuvers
Israeli war planes are conducting maneuvers in Iraqi airspace and using U.S. airbases in the country, possibly preparing for a strike against Iran, the newspaper reported, citing comments by Iraqi officials in local media.
``If the reports of the Israeli warplanes is true, it would be a major advance in the threat to Iran,'' said Mordechai Abir, director of energy research at Burnham Securities Inc. in New York. ``The noose is tightening around Iran,'' said Abir, who was speaking from Jerusalem.
Iran, the Organization of Petroleum Exporting Countries' second-biggest producer, this week tested missiles capable of reaching Israel. Iran has also said it may blockade the Strait of Hormuz, the shipping lane for a fifth of the world's crude, if its nuclear facilities are attacked.
About 4,500 employees of state-controlled Petroleo Brasileiro SA will take part in a protest on platforms in the offshore Campos Basin to get full pay for the day they return to the mainland after a 14-day shift at sea, a union official said yesterday. The basin is responsible for about 80 percent of the country's oil production.
In June, Petrobras produced 1.56 million barrels a day of oil and equivalent natural gas liquids from the Campos Basin, near Rio de Janeiro, according to the company's Web site.
Nigerian Cease Fire
The Movement for the Emancipation of the Niger Delta said attacks will resume on oil facilities. The Nigerian militant group said it will call off its unilateral cease-fire beginning at midnight on July 12.
MEND's attacks on pipelines and other installations have cut more than 20 percent of Nigeria's oil exports since 2006. MEND says it is fighting for a greater share of oil wealth for the impoverished inhabitants of the Niger Delta.
The group declared a cease-fire after a June 19 attack on Royal Dutch Shell Plc's Bonga oilfield, located 120 kilometers (75 miles) offshore that cut 190,000 barrels a day of production.
``You have the potential of more loss of oil from Nigeria, and Nigerian oil is the true gold,'' said Gordon Elliott, risk management specialist at FC Stone LLC, in St. Louis Park, Minnesota.
Nigeria produces low-sulfur, or sweet, crude oil, prized by U.S. refiners because of the proportion of high-value gasoline and distillate fuel it yields.
``All of the talk of a bubble bursting and the end of the commodity run-up was based on false hopes,'' Bentz said.
Brent crude oil for August settlement rose $4.69, or 3.3 percent, to $146.72 a barrel on London's ICE Futures Europe exchange. Prices climbed to $147.50, the highest since trading began in 1988.
July 11 (Bloomberg) -- U.S. stocks tumbled, extending the longest stretch of weekly losses for the Standard & Poor's 500 Index in four years, as oil jumped more than $5 a barrel and financial stocks fell on growing concern about the health of Fannie Mae and Freddie Mac.
Fannie Mae and Freddie Mac, the largest buyers of U.S. home loans, each lost about a third of their value, dragging down shares of Lehman Brothers Holdings Inc., Washington Mutual Inc. and Wachovia Corp. Wal-Mart Stores Inc. and Walt Disney Co. slid after crude advanced to a record above $146 a barrel, leaving consumers with less money to spend as fuel bills increase.
The S&P 500 lost 17.36, or 1.4 percent, to 1,236.03 at 10:55 a.m. in New York, its lowest level in two years. The Dow Jones Industrial Average fell 170.73, or 1.5 percent, to 11,058.29. The Nasdaq Composite Index slid 28.54, or 1.3 percent, to 2,229.31. Four stocks fell for each that rose on the New York Stock Exchange. The MSCI World Index retreated 0.9 percent, extending its slump from an October record to the 20 percent threshold that signals the start of a so-called bear market.
``It's the worst of both worlds,'' said Matthew Kaufler, portfolio manager at Clover Capital Management Inc. in Rochester, New York, which oversees $2.7 billion. ``Watching two government- sponsored entities evaporate before our eyes from an equity perspective, and the damage that does to investor confidence on the one hand, and watching the price of oil, which is clearly meaningful from a consumer and business perspective, continue to escalate upward creates other pressures.''
Bear Market
The S&P 500, which fell into a bear market for the first time since 2002 this week, is headed for its sixth straight weekly decline. The index has erased a 12 percent rally that was spurred by a government-backed rescue of Bear Stearns Cos. for less than its market value in March. Surging energy costs, deepening credit losses and rising unemployment threaten to reduce corporate profits even as Federal Reserve officials consider raising interest rates to fight inflation.
Europe's Dow Jones Stoxx 600 Index lost 1.9 percent. Asian shares rose.
Fannie Mae tumbled $4.55, or 34 percent, to $8.65. Freddie Mac lost $3.06, or 38 percent, to $4.94. A government takeover of one or both companies is among several options being weighed by White House officials, said Joshua Rosner, an analyst with Graham Fisher & Co. Inc., who met with the administration yesterday.
Officials may push for the firms, which own or guarantee about half of the $12 trillion of U.S. mortgages, to be placed in a conservatorship if their problems get worse, he said.
U.S. Treasury Secretary Henry Paulson said federal regulators are backing Fannie Mae and Freddie Mac in ``their current form.''
`Maintaining a Dialogue'
``Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission,'' Paulson said in a statement today. ``We are maintaining a dialogue with regulators and with the companies.''
Fannie Mae and Freddie Mac shares have both dropped more than 80 percent in New York trading over the past year on concern they don't have enough capital to weather the worst housing slump since the Great Depression. William Poole, the former St. Louis Federal Reserve President, said this week that Freddie Mac is ``insolvent,'' meaning it owes more than its assets are worth.
``We're very cautious on the financials and unfortunately we keep finding reasons to stay cautious,'' Jack Caffrey, a New York-based equity strategist at JPMorgan Private Bank, which oversees about $300 billion, said in an interview on Bloomberg Television. ``You have this sector under pressure and it will likely remain under pressure.''
The S&P 500 Financials Index dropped 1.9 percent to its lowest level since October 2002 and briefly dropped below its lowest closing level since 1998. The Financial Select Sector SPDR Fund, a so-called exchange traded fund that tracks U.S. financial stocks, lost 3.6 percent to $18.53.
Banks, Homebuilders Tumble
Other companies with home-loan businesses plunged today. Lehman Brothers Holdings Inc., once the biggest U.S. underwriter of mortgage bonds, dropped $3.65 to $13.65, the lowest since September 1999. Bank of America Corp., which closed its acquisition of mortgage-company Countrywide Financial Corp. last week, retreated 92 cents to $21.44. Wachovia Corp., the country's fourth-largest bank, lost 85 cents to $12.28. Washington Mutual Inc., the biggest U.S. savings and loan, dropped 45 cents to $4.80.
Homebuilders also tumbled. Lennar Corp. dropped 56 cents to $10.38. D.R. Horton Inc. fell 46 cents to $9.46. The S&P 500 Homebuilding Index declined 4.6 percent to the lowest in since 2001.
Companies that rely on consumers' discretionary purchases to boost sales retreated 1.9 percent as a group after the surge in crude prices bolstered expectations that Americans will reduce spending on cars, clothes and electronics.
Oil's Surge
Wal-Mart, the world's largest retailer, lost 48 cents to $56.73. Best Buy Co., the largest U.S. electronics retailer, declined $1.10 to $37.46. Disney, the largest operator of theme parks, slumped 55 cents to $29.05.
Crude futures jumped on concern that Israel may be preparing to attack Iran, while a strike in Brazil and renewed militant activity in Nigeria threaten to cut supplies. Prices have more than doubled in the past year.
Apple Inc. declined $1.70 to $174.93 even as the debut of its iPhone 3G drew thousands across Asia and Europe, with customers creating a half-a-mile-long line in Tokyo and braving summer heat in Madrid.
GE Earnings
General Electric Co. gained 39 cents to $28.03. The company's second-quarter profit fell 3.9 percent, matching analysts' estimates on increased demand for power-plant turbines, jet engines and commercial loans. Sales rose 11 percent to $46.9 billion, beating the average estimate in a Bloomberg poll of a dozen analysts.
The jump in oil fueled gains in energy companies, the only industry in the S&P 500 that advanced today. Chesapeake Energy Corp., the Oklahoma City-based oil and natural gas producer, added $3.22 to $64.80. Schlumberger Ltd., the world's largest oilfield contractor, gained $1.64 to $100.87.
Wynn Resorts Ltd. added $5.06 to $75. The casino company founded by billionaire Stephen Wynn reported second-quarter profit that rose more than some analysts estimated and said it would buy back as much as $500 million more in stock.
Anheuser-Busch Companies Inc. climbed $4.60 to $65.81. InBev NV raised its offer to buy the brewer by $5 a share to $70 a share, the Wall Street Journal reported, citing an unidentified person familiar with the matter.
Import Prices
Prices of goods imported into the U.S. rose more than forecast in June as record energy costs and a decline in the dollar made purchases of foreign products more expensive. The 2.6 percent increase in the import price index last month matched the gain in May, the Labor Department said. The index jumped 20.5 percent from a year ago, the biggest year-over-year increase on record.
The benchmark index for U.S. stock options rose to a three- month high. The VIX, as the Chicago Board Options Exchange Volatility Index is known, added 5.8 percent to 27.07 as of 10 a.m. in New York. The index measures the cost of using options as insurance against declines in the S&P 500.
The market briefly pared some of its loss after confidence among U.S. consumers unexpectedly climbed in July. The Reuters/University of Michigan preliminary index of consumer sentiment rose to 56.6 from 56.4 in June. Economists had forecast the confidence index would fall to 55.5, according to the median of 60 projections in a Bloomberg News survey.
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