RTC Director

BP faces tight deadline to seal Rosneft share swap

BP (BP.L) will struggle to meet a Monday deadline to complete its US$16 billion share swap with Russian group Rosneft, leaving the companies to agree a second extension or allow the deal to fall apart. BP Chief Executive Bob Dudley, who has been criticised by investors for the difficulties encountered in executing the deal, said he was optimistic that it would be concluded but declined to express a view on whether the deadline would be met. “I think we will find a resolution to this over time,” Dudley told Reuters in an interview on the sidelines of a conference in St Gallen on Friday.

Analysts said the opacity around the situation made it impossible to know whether Rosneft would agree to extend the deadline but noted a lot of elements had to be agreed before the share swap could be concluded. BP and Rosneft agreed to a $16 billion share swap and an exploration venture aimed at unlocking potentially 40 billion barrels of oil in the Russian Arctic Sea in January. The deal, which was announced with great fanfare by BP, was supposed to mark a turning point in the London-based oil giant’s fortunes after the Gulf of Mexico oil spill. But BP’s oligarch partners in its Russian joint venture, TNK-BP (TNBP.MM), objected, saying the transaction violated an agreement BP made, when founding TNK-BP, to use TNK-BP as its principal vehicle for investment in Russia.

AAR, the group which represents the four oligarchs that own a half-share in TNK-BP, secured an injunction blocking the Rosneft tie-up, unless BP convinces Rosneft to execute the Arctic deal through TNK-BP. However, it is unclear if Rosneft, Russia’s largest oil producer, will agree to working with TNK-BP.  The Kremlin-controlled company has previously said it saw no sense in partnering with TNK-BP, which has no offshore experience. The agreement, sealed in January, to swap a 5 per cent stake in BP for a 9.5 per cent stake in Rosneft expires on Monday, having already been extended once already.

The two stakes were valued at around US$8 billion at the time the deal was signed but BP’s shares dropped due to fears about the dispute with its TNK-BP partners, while Rosneft’s shares have risen, creating a US$1.4 differential between the value of the two stakes currently. BP investors fear that Rosneft may demand a redraft in the terms that could see BP paying, either in cash or shares, another $1billion or more to complete the deal—something which would further dent Dudley’s credibility.

(Reuters)

by RTC Director

As stock market slows down, defensive stocks shine

After sailing through its best first quarter since 1998, the stock market is starting to lose some momentum. The Standard and Poor's 500 stock index, a broad market benchmark, is up just 1 percent this quarter after jumping 5.4 percent in the first three months of the year, in large part because of conflicting data about the health of the economy.

One group -- defensive stocks -- is doing just fine. Utilities, health care and consumer staples are all considered a good defense against a slowdown because they tend to have stable profits no matter what happens in the broad economy. The items they sell aren't ones people stop buying when their budgets are tight. And for the last six weeks, investors have been putting money into stocks of companies like Aetna or Kraft Foods that cater to everyday needs, like health insurance or coffee.

Each of the defensive industry groups has gained more than 5 percent this quarter. Health care -- the best of the three -- is now up 14.2 percent for the year, after lagging sectors like energy and industrials during the first quarter. What's more, the number of shares exchanging hands in defensive industries is also increasing. Higher volume often signifies that a stock on the rise will continue to rise -- or that a declining stock will keep falling -- because it reflects increased investor interest in a stock. The daily trading volume of the SPDR Consumer Staples Select ETF, for example, is double the rate it was in January.

Meanwhile, industrials, a group that investors buy more when they expect an economic pickup to lead to new buildings or machines, are flat for the quarter. Energy companies are down 6.9 percent this quarter because several reports have indicated demand for oil is falling as gas nears $4 a gallon.

"People are becoming more conservative in their outlook and their spending as oil prices have risen," said Quincy Krosby, the chief strategist at Prudential Financial. Investors have begun to worry that energy prices will sap consumer and business spending, she said.

There has been good news about the economy recently. More companies in the S&P 500 are beating analyst sales estimates this quarter than at any other time since the recession ended nearly two years ago. Companies are also adding jobs at the quickest pace in five years, with 700,000 jobs added in the last three months.

Even so, Andrew Goldberg, a market strategist for J.P. Morgan Funds, believes defensive stocks will continue to do well until it's clear that oil prices will not be a drag on overall growth.

"If Americans are spending more money on gasoline, that means less money will be spent on flat-screen TVs and vacations," said Goldberg. "You have to view this economic recovery as a patient in the I.C.U. We're off the respirator and well on the way to a full recovery, but oil prices can cause a relapse."

Investors who think that the growth rate of economy isn't going to lead to higher corporate profits are attracted to defensive companies for two reasons. These companies -- in the business of providing everyday needs like electricity, toilet paper, and telephone service -- are in industries that deliver reliable earnings. Kraft, for example, saw its sales fall only 4 percent in 2009 even though consumers cut back elsewhere. Even with that drop, the company has increased sales by an average of 7.6 percent annually over the past five years.

That allows defensive stock companies to pay higher dividends than, say, a technology company that may be expanding its business rapidly. AT&T Inc. pays a quarterly dividend of 43 cents per share, giving it a 5.5 dividend yield. That's far higher than the 3.18 percent yield on a 10-year Treasury note and vastly more than an investor would get from, say, consumer favorite Apple Inc., which doesn't pay a dividend.

Defensive stocks are also a cheap way to get dividend returns compared with the S&P 500 index, which currently costs 15 times earnings and yields 2 percent. AT&T costs just 9 times earnings, despite gaining 2.8 percent this quarter.

Coca-Cola Co., another defensive stock, costs 13 times earnings after gaining 2.8 percent this quarter and comes with a 2.8 percent yield. Google, by comparison, costs 23 times earnings and doesn't pay a dividend. It's fallen nearly 10 percent over the quarter. Higher yields mean that investors will still benefit even if stock prices stall, Goldberg said.

Of course, some investors are buying defensive stocks simply because many underperformed over the past two years.

Dimitre Genov, the portfolio manager at the $58 million Artio Global Equity Fund, bought Dean Foods last year when its 52 percent drop landed it among the five worst-performing stocks among the 500 companies that make up the S&P index. The Dallas-based company, the country's largest dairy, is up 34 percent this quarter, thanks in large part to quarterly results that topped Wall Street's expectations after the company cut costs and raised its forecast for full-year earnings because grocers are raising costs for store-brand milk, the company's chief competitor.

"The laggards of last year are the winners now," he said.

by RTC Director

Late payments on mortgages fall again in 1st qtr

The number of homeowners making late payments -- or no payments -- on their mortgages fell for the fifth straight quarter in the first three months of 2011. But the figure remains stubbornly high compared with the pre-crisis norm, likely because of the huge backlog of homes waiting to be foreclosed.

The rate of borrowers nationwide who were 60 days or more past due on their mortgage payments fell to 6.19 percent for the three months ended March 31, according to credit reporting agency TransUnion. That was down from 6.77 percent at the same time last year.

Delinquency rates were highest in Florida, at 14.37 percent, down from 14.65 percent a year ago, followed by last year's leader, Nevada, at 14.19 percent, down from 15.98 percent.

Arizona was next, at 9.14 percent, compared with 10.94 percent in the 2010 first quarter. California, fourth at 8.58 percent, showed the biggest drop of any state in the past year, falling from 10.68 percent. These four states were the hardest hit by the housing meltdown.

North and South Dakota continue to have the lowest delinquency rates in the country, at 1.54 percent and 2.53 percent, respectively.

South Dakota's rate actually rose, from 2.44 percent last year, one of nine states that saw an increase in late payments compared with last year. The biggest increase was in Maine, where delinquency climbed to 5.04 percent of borrowers, from 4.64 percent in the 2010 first quarter.

While the rates in most states and the nationwide rate are down from their peaks, they are still not near the pre-recession normal of around 2 percent, said Tim Martin, TransUnion's group vice president for the U.S. housing market. Nor has the mortgage delinquency rate improved as much as similar statistics for credit cards or auto loans.

"It's still a long way from the norm, and not improving as much as some of the other credit types," he said.

One reason for the rate to remain stubbornly high is the length of time it takes to foreclose on a house. There are up to 3.7 million seriously delinquent homes in the country, according to some estimates. And foreclosure listing firm RealtyTrac Inc. said last week that processing delays appear to be getting worse. In states like New York, for example, it now takes an average of more than two years for a home to go from the initial stage of foreclosure to being repossessed by a bank.

TransUnion's data is culled from 27 million credit reports, representing about 10 percent of all U.S. consumers who actively use some form of credit.

If delinquency continues to improve at its current pace, Martin said rates won't return to normal for another 8 years. "It just gives you a sense for how high these rates are, historically speaking, and how far we have to go at this kind of slow improvement pace," he said. TransUnion expects rates to continue drifting down through the rest of the year.

Data show that home prices and unemployment are strongly correlated with delinquency. While few mortgages written in recent years are falling into delinquency, Martin noted that housing prices appear to be falling again, which could discourage homeowners with little or no equity in their property from making their payments.

by RTC Director

Weak economic signals steer Asia down

A loss of momentum on Wall Street and worries over Europe's debt problems dampened investor enthusiasm and led Asian stock markets lower Monday.

Oil prices fell below $99 a barrel Monday in Asia as crude became more expensive for investors with other currencies amid a U.S. dollar rally.

Japan's Nikkei 225 index dropped 0.6 percent to 9,587.85 with banking shares incurring losses following comments last week by Chief Cabinet Secretary Yukio Edano suggesting that Tokyo Electric Power Co. will need help repaying its debts. Mitsubishi UFJ Financial Group Inc. lost 1 percent. Mizuho Financial Group lost 0.8 percent.

Edano said Friday that TEPCO may need adjustments to its loans to help it cope with financial losses incurred following twin natural disasters on March 11 -- an earthquake and subsequent tsunami that smashed into one of the company's nuclear plants in northeastern Japan.

The utility has been struggling for two months to bring a radiation leak from the crippled Fukushima Dai-ichi plant under control. TEPCO has sought a 2 trillion yen ($24.8 billion) loan to tide it through the initial emergency period.

It also expects to pay 50 billion yen ($620 million) in initial compensation to nearly 80,000 residents evacuated from around the plant. Overall damages are expected to be much higher.

South Korea's Kospi lost 0.5 percent to 2,108.45, and Hong Kong's Hang Seng was down 1.1 percent to 23,024.82. Benchmarks in Australia, Singapore and Taiwan were also lower.

Analysts said investors were worried about Greece's debt crisis and the absence of an energetic global economic recovery.

On Wall Street, stocks finished lower "as investors continued to worry about slowing global growth and European debt concerns," said Ben Potter of IG Markets in Melbourne.

After sailing through its best first quarter since 1998, U.S. stock markets are starting to lose some momentum. The Standard and Poor's 500 stock index, a broad market benchmark, is up just 1 percent this quarter after jumping 5.4 percent in the first three months of the year, in large part because of conflicting data about the health of the U.S. economy.

Meanwhile, industrials, a group that investors buy more when they expect an economic pickup to lead to new buildings or machines, are flat for the quarter. Energy companies are down 6.9 percent this quarter because several reports have indicated demand for oil is falling as gas nears $4 a gallon.

Benchmark crude for June delivery was down 84 cents to $98.81 a barrel in electronic trading on the New York Mercantile Exchange. The contract settled at $99.65 per barrel Friday, up 68 cents.

In currencies, the dollar rose against the euro to $1.4096 from $1.4110 in late afternoon trading Friday in New York. The dollar strengthened to 80.99 yen from 80.84 yen.

by RTC Director