Friday, 17 September 2010

Why Nokia can't crack the U.S. market

NEW YORK ( -- Like soccer and small cars, Nokia is popular everywhere in the world except the United States.

Though that near-global popularity has made the company the clear No. 1 handset maker in the world, the tide has shifted, and Nokia is struggling to keep up with the pace of innovation set by Apple (AAPL, Fortune 500) and a number of Android smartphone manufacturers.

Nokia's market share has slipped to 35% this year, according to IDC. That's down from 48% in 2006, the year before Apple unveiled the iPhone. But Nokia's overall performance is significantly better than its showing here in America. Nokia phones make up just 7.8% of the U.S. handset market, according to comScore, far behind leaders Samsung, LG and Motorola (MOT, Fortune 500).

Nokia's rapidly declining market share and absence of visibility in the United States have led investors to send shares of Nokia (NOK) tumbling 75% since its peak in the fall of 2007.

Those factors combined to create a crisis of confidence at the Finnish company. Days before unveiling its new smartphone lineup, Nokia decided last week to oust its CEO and name a North American replacement: Microsoft's Stephen Elop.
"The appointment of an executive from an American company to the CEO post at Nokia is a good indication of the company's renewed focus on the U.S. market," said Dan Hays, partner at consulting firm PRTM. "One of the core issues for Nokia is the United States."

America is a country that Nokia has historically been unable to play nice with. Unlike wireless providers abroad, carriers here like to exercise some control over the look and feel of the devices running on their networks. Other device manufacturers are willing to collaborate, but Nokia has been unwavering in its insistence on having complete control over both the hardware and software of its phones, Hays said.

Some analysts remain skeptical that much will change, even with the new leadership.

"We always hear from Nokia, 'The U.S. is important to us and we're adjusting our strategy,' but it has never worked," said Ramon Lamas, analyst at IDC. "Hiring Elop doesn't necessarily equate to a renewed North America focus."
Still, the infusion of new blood means just about anything at Nokia is fair game. Struggling in all of its key areas, Nokia needs to take a hard look at each of its strategies and product road maps.

That could mean taking a page from America's playbook and ditching Nokia's own proprietary operating systems, Symbian and MeeGo, for Google's (GOOG, Fortune 500) Android.

Android has a number of advantages, not least of which is the fact that it's free for manufacturers to license. Nokia has devoted tremendous time and resources to improving its Symbian software, and it launched a high-profile partnership with Intel (INTC, Fortune 500) to create a second, separate operating system called MeeGo for high-end phones.

By embracing Google's Android operating system, Nokia could follow in the footsteps of Motorola, which struggled to make a winning device to replace its top-selling RAZR until it ultimately adopted Android for its Droid smartphone.
But analysts think that moving to Android is almost entirely out of the question for Nokia. The yet-to-be-released MeeGo has a growing wave of developer support and momentum behind it, and Symbian remains popular among its users.
Plus, ditching its proprietary software would leave Nokia scrambling to stand out in a crowded field.

"Nokia is the market leader, and as such it cannot do what everyone else does," said Carolina Milanesi, analyst at Gartner. "Nokia has spent too much money and resources to get to where it is today."

For all those resources, the most crucial issue facing Nokia is that its phones just aren't all that great. Nokia is way behind its rivals on innovations like touch screens, thin materials, and design. If Nokia was satisfied with its phone lineup, why would it overshadow the much-hyped N8's unveiling with a management shakeup?

The real lesson Nokia should learn from America, say some in the industry, is that it needs to make its phones high-quality vessels for great applications. That's what ultimately made the iPhone take off, and that's what's fueling the Android surge as well.

"Nokia certainly doesn't need North America to survive or even thrive, as the real growth is being generated in emerging markets where Nokia's brand remains strong," said Andy Castonguay, analyst at Yankee Group. "But if it could harness some of the innovation being generated by U.S. app developers, together with a sharp portfolio of smartphones and a more dynamic OS, Nokia can still turn it around."

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What happened to Europe's collapse?

FORTUNE -- Sherlock Holmes said it best. In Arthur Conan Doyle's classic story "Silver Blaze," about the disappearance of a champion racehorse, there is an exchange between a Scotland Yard detective and Holmes:

"Is there any point to which you would wish to draw my attention?" asks the detective.

"To the curious incident of the dog in the night-time," replies Holmes.
"The dog did nothing in the night-time," says the detective.
"That," says Holmes, "was the curious incident."

Europe, this summer, has been curiously full of dogs doing nothing. Just a few months ago, in the wake of Greece's sovereign-debt crisis and the long, muddled response to it by European political leaders, it was common to hear dire predictions about Europe's economic prospects. Pundits declared that the euro -- the currency shared by 16 countries -- was fundamentally flawed; economies that differed widely in competitiveness could not indefinitely have a common monetary policy when they neither shared a common labor market nor kept to agreed-upon rules on fiscal policy.

The euro was bound to continue its recent fall against the dollar. Europe's highly indebted economies -- the famous PIIGS, or Portugal, Ireland, Italy, Greece, and Spain -- could satisfy the bond markets only if they made drastic budget cuts and reformed their sclerotic labor markets, which in turn would lead to massive public resistance and political crises.

Yet here we are, as the evenings lengthen, and ... no dog has barked. The euro has been strengthening against the dollar. Europe's political commitment to the single currency remains as strong as ever. There has been remarkably little labor unrest in Greece since the spring, nor in Spain, where the government adopted a tough austerity package that included wage cuts for public servants. In Britain the new coalition government has set out radical proposals for tax increases and expenditure cuts designed to shrink the public deficit from 11% of GDP now to 2.1% in 2014-15. Yet Prime Minister David Cameron remains popular, with Britons willing, it seems, to happily trade a silk jacket for a hair shirt.

There is, of course, an easy explanation for the apparent acquiescence in European public opinion: summer! Europeans had the World Cup to enjoy in June and July, and always have better things to do in August than hold protest marches against austerity. Now that everyone's back from the beach, we'll see the political backlash, right?

I'm inclined to think not. The truth is that the European economies are doing better than expected. Everyone knows about Germany's stellar performance this year, with an unemployment rate now lower than it was in summer 2008 (in the U.S. it is 3.5 percentage points higher), while growth in the second quarter was the best quarterly figure for 20 years.

But there are some bright spots in Europe's peripheral economies too. Consider Ireland. Given troubled banks, a debt downgrade, and high unemployment -- the July rate of 13.7% was the worst since 1994 -- you might think there was no good news there. But Barry O'Leary, chief executive of IDA Ireland, the nation's investment agency, says that there has been a significant "repricing of the economy" since the Great Recession bit. In 2009, Irish public sector pay was cut as an austerity measure, and O'Leary says private sector salaries have followed suit, with reductions of 10% to 15%.

The IDA is now once again seeing investors who want to develop manufacturing capabilities in Ireland, the sort of labor-intensive operations that had lately seemed destined to always go Asia's way.

I don't want to sound as if my brain's been addled by too much time on a sun-kissed Greek beach. (I wish.) It's the easiest thing in the world to trot out the challenges that face Europe over the coming decades: aging populations and inflexible labor markets; the need for the German export powerhouse to expand domestic demand; distinct national consumer preferences and regulatory regimes that stop companies from taking good ideas to a global scale -- that list has been the same for 20 years. And so has this truth: Europe remains the world's most populous area of widely distributed prosperity, long life, and good health. They're doing something right over there. Long may the dogs not bark!

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Consumer bureau: More disclosure, fewer hidden fees

WASHINGTON ( -- With Elizabeth Warren as an adviser, the new Consumer Financial Protection Bureau is officially en route to becoming a tough new regulatory body on behalf of consumers.

The set-up process is expected to take 10 months, with an official launch date of July 21, 2011, according to the Treasury Department.

What can consumers ultimately expect? More disclosures and fewer hidden fees.
"The time for hiding tricks and traps in the fine print is over," Warren said on the White House Website.

The Consumer Financial Protection Bureau was the signature piece of the Wall Street reform bill that Congress passed and the president signed into law in July.
The new regulatory bureau will be independent. It will have the power to create rules curbing unfair practices in mortgages, credit cards and a plethora of consumer loans issued by banks and payday lenders, private student loan lenders and check cashing companies.

"Financial innovation has not resulted in simpler, better products, it's resulted in more complicated products," says Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group. "Consumers are going to know that there's someone who's got their back and help them wade through the financial morass."

Obama names Warren as special adviser
The agency has already hired 36 staffers and has a hearing scheduled Tuesday, soliciting expert opinion on creating a simplified mortgage disclosure firm, which the new law requires, said Treasury spokesman Steven Adamske.
Here are some of the things that the bureau is slated to tackle when it gets set up.

Simpler mortgage disclosure forms: The new law requires the agency to set up a standard type of mortgage disclosure form. Lenders won't be required to offer the form, but they may have incentives to use the simpler forms.

Overdraft fees: The regulator will have the power to craft new rules that would make it clear what kinds of fees banks can and can't slap on consumers who overdraw their accounts.

Credit scores: All consumers have been able to get one free credit report a year from the credit rating agencies. But the law allows a consumer to get an actual credit score along with a report, and the agency will oversee that.

Ban on 'liar loans': The regulator would be charged with ensuring lenders are documenting borrowers' income before originating a mortgage and verify a borrower's ability to repay the loan.

Pre-payment penalty fees: The law requires the consumer bureau to crack down on penalty fees consumers often face when they pay off mortgages early.

Mandatory arbitration contracts: Many mortgages, credit cards, gift cards and auto loans force the buyer and seller to hash out disputes before a neutral party called an arbitration panel. These arbitration contracts prevent disputes from going to court, with an eye toward forcing parties to work things out and cut down on lawsuits. The act directs the agency to study the contracts while giving it power to ban them as well.

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Thursday, 16 September 2010

Gold hits record high ... again

NEW YORK ( -- Gold prices surged to new record highs on Thursday, continuing a rally started earlier in the week.

Gold futures for December delivery rose $5.10 to close at a record high of $1,273.80 an ounce in New York. That topped the previous all-time high closing price of $1,271.70, which came on Tuesday. Earlier in the day, contracts were trading even higher, at $1,279.50 an ounce.

Typically seen as a safe haven, gold is the ultimate currency for many investors. It involves the lowest risk because it is a tangible asset, and shows the highest upward price potential during times of stock and currency volatility.

Uncertain financial markets, weak economic conditions and the stressful political conditions of the mid-term elections are the main causes for rising prices, said Carlos Sanchez, a precious metals analyst with CPM Group.

And today's record might just be the beginning, with no sign of any of these worries easing up. Sanchez said gold prices will likely keep rising through the first quarter of next year. "The next level is $1,300 -- possibly by the end of this month. And I would not be surprised if it heads up to $1,400 by the end of this year."

Additionally, with the flood of U.S. dollars in the market and serious concerns over European countries' ability to back up debt obligations -- not only investors, but countries such as China, Russia and Egypt are buying gold.

While gold prices hit a record on Thursday, they were still a far cry from their real peak, as measured in dollars adjusted for inflation.

Gold hit its summit on Jan. 21, 1980, when it peaked at $825.50 an ounce -- in 1980 dollars. That translates to an all-time peak of $2,184.08 an ounce in 2010 dollars.
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Hurd: 'No company better positioned than Oracle'

NEW YORK ( -- Mark Hurd, Oracle's new co-president, praised Oracle's strong first-quarter financial performance on Thursday and forecast a very bright future for his new employer.

"I see clear growth opportunities going forward," Hurd said on a conference call with analysts, one of his first public appearances on Oracle's behalf. "There is no other company in the industry better positioned than Oracle. There is no one else in the market with the software and hardware assets that can match Oracle."

Hurd, who was hired last Monday, kept things light and on-message during the call, steering clear of the controversy that has engulfed his short tenure at HP's competitor. HP (HPQ, Fortune 500) is suing Hurd for breach of contract, and IBM (IBM, Fortune 500) CEO Sam Palmisano criticized Hurd this week for slashing research and development spending while heading HP.
The only sparks on the call came from Oracle CEO Larry Ellison, who tore into archrival SAP for its "colossal mistake" in daring to challenge Oracle's software strategy.

"Fusion will be redone 100% in Java," Ellison said, referring to Oracle's new software platform. "SAP is going to compete with us using their 25-year old technology. Good luck."

Oracle reported strong, double-digit sales and profit growth in its first-quarter, on the back of rising demand for business software and servers.
New software license sales rose 25% and license updates rose 12%, a signal of robust demand for Oracle's products.
"I've been doing this a long time," Hurd said. "Twenty-five percent license growth is a big number."

Oracle Co-President Safra Catz called the license renewals "frankly outstanding.
Though Oracle is known for its business software products, the company's executives and analysts spent the majority of the call focusing on the company's integration of Sun Microsystems, which is predominantly a server maker. Oracle completed the $7.4 billion Sun purchase in January.

Ellison noted that analysts and investors have expressed a lot of concern about Oracle going into the hardware business, so he recapped the company's achievements so far and outlined plans for the future.

Oracle has already made Sun profitable by discontinuing sales of products that weren't making money, and by streamlining Sun's operations, he said. As an example, Ellison pointed to Oracle's reduction in the number of Sun's contract manufacturers.

"To quote one of our great presidents, 'Mission accomplished,'" Ellison said. "We think it's going to become more profitable over the fiscal year."
The brash CEO also set ambitious goals for Sun. Oracle thinks it can double the size of its hardware business. Next week, at Oracle's OpenWorld conference, the company plans to announce new high-end systems that combine Sun's hardware with Oracle's software offerings.

By the numbers
Oracle had a very solid financial performance in quarter ended Aug. 31. Net income rose to $1.4 billion, or 27 cents per share, up 20% from a year earlier.
Results included one-time charges totaling 15 cents per share. Without the charges, Oracle said it earned 42 cents per share. Analysts polled by Thomson Reuters, who typically exclude one-time items from their estimates, forecasted earnings of 37 cents per share.

Sales for the Redwood City, Calif.-based company rose 48% to $7.5 billion, topping analysts' forecasts of $7.3 billion.

For the current quarter, Oracle said it expects sales to increase by 43% to 47% and earnings per share of between 45 cents 47 cents, excluding one-time benefits or charges.
Shares of Oracle (ORCL, Fortune 500) rose 4% after hours. The company's stock has been on a tear lately, rising 11% since Hurd came on board
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Stocks stuck in a rut

NEW YORK ( -- On paper, investors have plenty of reasons to get off the sidelines. The jobs landscape has been improving, manufacturing has expanded for 13 straight months, and other economic reports have been pointing to steady growth.

But company hiring reports have been mixed, leaving investors confused. On Thursday, FedEx said it would cut jobs, while Boeing said the industry needs to ramp up hiring. Small business hiring is similarly mixed. Stocks have drifted on this muddied picture, trading in a narrow range.

On Thursday the Dow Jones industrial average (INDU) rose 22 points, or 0.2%, to end at 10,594.83. The S&P 500 (SPX) was flat at 1,124.66 and the Nasdaq (COMP) added 2 points, or less than 0.1%, to close at 2,303.25.
Indexes had been down slightly for most of the day, but they rose modestly in the last hour of trade. Banking, energy and housing shares ended mostly lower, while tech and retail shares turned higher.

September is a historically down month for stocks -- but they started out the strong, with a rally in the first three trading days as the government's monthly jobs report showed improvement. As more data have come out this month, though, movement has slowed.

"We're entrenched in the same patterns recently," said Stephen Carl, head equity trader at Williams Capital Group. "Data aren't pushing us one way or the other."
Investors remained nervous Thursday about Japan's intervention in the currency market. On Tuesday, the nation's government said it would buy up yen in an attempt to curb deflation.

The yen purchase boosted the U.S. dollar, which helped lift stocks Wednesday. But it also kept uncertainty about the recovery at the forefront of investors' minds, sending gold prices to new record highs. The precious metal is considered a "safe" spot to park cash during times of uncertainty.

The Fed's gold problem
Economy: The Labor Department's weekly report on initial jobless claims showed 450,000 people filed for first-time unemployment benefits last week. Economists expected 460,000 new claims.
Initial claims have been stuck in a tight range since November, and economists say there's little reason to celebrate the recovery until weekly claims head below the 400,000 mark.

The producer price index also came out before the bell. The reading of inflation at the manufacturing level rose 0.4% in August, versus an increase of 0.2% the prior month.

RealtyTrac said the number of homeowners falling behind on their loans -- enough to attract initial notices of default -- fell 30% in August. The lower rate should translate into fewer people losing their homes, but the report also showed lenders repossessed a record 95,000 homes last month.
The Philadelphia Fed Index showed the region's manufacturing activity contracted slightly in September, due to a drop in new orders. But hiring has picked up this month.

The Senate passed a $42 billion bill aimed at helping small businesses. The Senate's version of the Small Business Jobs Act will now have to go back to the House, where it's expected to pass, before President Obama can sign it into law.
Retirement investing: Don't abandon stocks
Companies: FedEx (FDX, Fortune 500) said it expected to see moderate growth in the global economy, but the shipping company will still cut 1,700 jobs.
FedEx, which is considered a bellwether for the global economy, also reported fiscal first-quarter earnings of $1.20 a share. That's a penny below analysts' estimates, but still up 57 cents from a year earlier. The company raised its outlook but that still fell short of forecasts. FedEx shares fell to end 3.8% lower.

oeing said the airline industry will need to hire more than 460,000 pilots and almost 600,000 maintenance workers over the next 20 years, to meet growing demand in the airline industry. The company predicted the industry as a whole will need to hire more than one million workers over the same time period.
Microsoft (MSFT, Fortune 500) said its new video game "Halo: Reach" earned $200 million in sales on its launch day. The company will start selling Kinect, a full-body motion-sensing game system, on November 4.

After the bell, Oracle (ORCL, Fortune 500) reported a quarterly profit and sales that beat Wall Street's forecasts. The corporate software company said its net income in its fiscal first quarter rose to $1.4 billion, or 27 cents per share, up 20% from a year earlier. Sales rose 48% to $7.5 billion.
Oracle shares rose 3% in after-hours trade.

BlackBerry maker Research in Motion (RIMM) reported quarterly profit that beat analysts expectations and issued an upbeat forecast. The Canadian company reported net income of $796.7 million, or $1.46 per share in its fiscal second quarter. Sales increased 31% over the quarter to $4.62 billion.
The figures easily topped estimates, and RIM shares surged 8% in after-hours trade.

World markets: Asian markets closed lower. Japan's benchmark Nikkei index fell 0.1%, and Hong Kong's Hang Seng index fell 0.2%. The Shanghai Composite sunk 1.9%.

European shares ended lower. The CAC 40 in France lost 0.5%, Germany's DAX fell 0.2%, and Britain's FTSE 100 slipped 0.3%.
Currencies and commodities: The dollar fell against the euro and the Japanese yen, but posted slight gains against Britain's pound.
Oil futures for October delivery fell $1.45 to settle at $74.57 a barrel.
Gold futures for December delivery jumped to a fresh record intraday high early Thursday of $1,279.50 an ounce. That trumps the previous intraday record of $1,276.50 an ounce, which was just set on Tuesday.

The precious metal also hit a settlement record, closing at $1,273.60 an ounce. Gold has gained traction as investors turn to it as a "safe haven" play in times of economic uncertainty. For that reason, the precious metal is an indicator of investor sentiment.

Bonds: The yield on the 10-year Treasury note rose to 2.76% from 2.72% late Wednesday.

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Wednesday, 15 September 2010

Avandia: a PR mess for Glaxo, but not a financial one

FORTUNE -- GlaxoSmithKline is on the hook for Avandia, a drug that helps diabetes patients regulate blood sugar levels, but also causes heart problems. Critical reviews in major medical journals have repeatedly challenged its safety, and mainstream media have picked up on the studies in scathing articles. GSK has tried to defend the drug from the attacks, but there's only so much the company can do.

Yet the outcry against Avandia's safety issues probably won't reach Glaxo's pocketbook. Unless someone, like one of the thousands of plaintiffs suing Glaxo, (GSK) funds a big, expensive, technically difficult study, the drug-maker is probably in the clear.

Most recently, Avandia has come under fire in the British Medical Journal, which claims the drug never should have reached the market in the UK. The authors outline all of the reasons why the British regulatory body called the European Medicines Agency should pull the drug.

This is the latest of a long history of legal problems for Avandia, starting in 2007 with a study co-authored by a well-known cardiologist Steven Nissan. Nissan looked back at studies that GlaxoSmithKline had done about the efficacy of the drug, and sifted through the data to see if patients taking Avandia had suffered an unusually high rate of heart attacks. He found that they did.

The FDA called the first Avandia advisory panel in 2007. After hearing the panel's advice, the regulator ruled that the drug should stay on the market with more warning labels. The FDA also demanded that GlaxoSmithKline foot the bill for an in-house study to see whether Avandia increased the risk of heart attacks.

Sales of the drug plummeted in 2007, due to the controversy. Revenue has since plateaued, keeping Avandia as a money-maker for Glaxo, raking in a little over a billion dollars a year. That's about a third of the revenue it generated as a top-blockbuster when it was first released in 1999.

In 2009, more evidence cropped up in the case against the drug maker -- some of it suggesting that Glaxo knowingly skewed data that would have revealed Avandia's dangerous side effects. This past July, the FDA assembled a panel of 33 experts to advise whether or not to pull the drug. The recommendation was soft.
"The panel seemed to take the easy way out by just saying, 'label it more and let everybody figure it out,'" says Les Funtleyder a health-care analyst at industrial trading firm Miller Tabak + Co.

Post-patent Avandia
Glaxo will lose its patent for Avandia in 2012, and the company will probably fight for the drug to the end, despite its dangers, because that's simply what drug companies do. Even if Glaxo bowed to reality, throwing in the towel on fighting to extend the patent would probably be fodder for victims' lawsuits. Either way, the fight doesn't make Glaxo look good. "If it turns out to be as dangerous as the people say it is, then Glaxo is just raising the litigation bar in the future," Funtleyder says.

Even after Glaxo eventually loses the patent (all drugs eventually 'go generic' thanks to federal laws meant to lower the price of health care) the company could have to deal with problems discovered about the drug in the future, especially since the Avandia brand will probably stay on the market after 2012.
"They must believe they can weather the storm and still make money," says Robert Green, a pharmaceutical intellectual property lawyer with Leydig, Voit & Mayer.

Glaxo is still making off of Avandia now. Its half-billion dollars in sales last year in sales still translates to almost $1.5 million a day, which should cover legal fees for settling lawsuits. As for weathering the storm, Glaxo is in a good situation, in some ways. The drug has been pummeled for so long that shareholders have numbed to fluctuations in the revenue stream. "I think maybe investors have gotten Avandia distress fatigue," Funtleyder says.

The new paper in the British Medical Journal probably won't jolt them out of it. "You'd actually need something quite a bit more to shock everybody-you almost need a smoking gun," says Funtleyder.

It will be difficult to find one. Even the most damning third-party study, which is Nissan's from 2007, wasn't a controlled trial designed to study to study the drug's risk of causing heart attacks. GlaxoSmithKline never did one before the drug was launched.

You could argue that they should have, but there was no real incentive. It's true that the Actos and Avandia are both derivatives of a drug called troglitazone, which was pulled from the US market in 2000 because it caused liver and heart problems in patients. But the compounds in Actos and Avandia are chemically different enough from troglitazone that there is no legal requirement to study whether they cause similar problems.

Regulators only have weak data by which to make decisions about Avandia. In 2007, the FDA mandated that GlaxoSmithKline design a study to test whether Avandia increased risk for heart attacks. They did, but it was flawed. In an internal memo, FDA official Thomas Marciniak admitted that the FDA did not review the study design before it was launched. "If we had, we would have judged it to be unacceptable."

It's difficult to design a trial to test the effectiveness of diabetes medication. For one, people participating in the trial already have a high risk for heart attacks. "It takes a fairly significant patient study to show there's a nexus between things like increased heart attacks and consumption of the drug," Green says.

You would need a randomized, controlled trial looking at risk of heart problems between two patient groups-one taking Avandia, and a control group taking a regimen of diabetes drugs in a different class. No one has done that. No one probably will.

The closest that could happen is something called the TIDE trial that GlaxoSmithKline started in 2007. It compared Avandia with another drug made from a similar compound, called Actos.

"The TIDE trial is the only ongoing GSK-sponsored clinical trial with rosiglitazone [Avandia's active ingredient]. It is a gold standard, large, controlled, prospective, cardiovascular outcome study comparing rosiglitazone to pioglitazone [Actos] and will provide the best evidence regarding the comparative cardiovascular safety of rosiglitazone and pioglitazone," says Mary Anne Rhyne, the director of US media relations for GSK.

But TIDE is a non-inferiority study. This means that the trial is not designed to test whether one drug is better, but to test whether one drug isn't worse. These trials are weaker. In fact, the Government Accountability Office recently reviewed this study design and found it necessary in some cases, but lacking.

Second, the study compares two drugs of the same class. A study completed by health insurer WellPoint Inc found that both drugs increased the risk of heart attacks in patients by the same rate. The study looked at insurance claims filed by patients, and didn't compare the drugs against a control group receiving a placebo, or to a control group receiving a different treatment regimen. That means a problem with this entire class of drugs would not show up in the study.
Perhaps for these reasons, the FDA halted the TIDE study in July. In the meantime, both drugs are still on the market.

By the time the TIDE trial picks up again, if it does, the results won't come out until after Glaxo loses Avandia. It will be much easier for the company to wean itself off of the money it's making on Avandia when the drug is facing competition from generics.

The window of opportunity to punish Glaxo for marketing a drug with dangerous side effects will also have probably passed. The only hits the company will take is to its reputation, and investors will likely forive all the next time Glaxo can push another blockbusters through its pipeline.

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Obama slams GOP on taxes, small business aid


CNN -- President Barack Obama tore into GOP congressional leaders again Wednesday for trying to block his small business aid bill and opposing his plan to extend the Bush tax cuts only to those making under $250,000.

Flanked by his economic team at the White House, the president specifically thanked GOP Sens. George Voinovich of Ohio and George LeMieux of Florida for breaking with the Republican leadership on the small business bill.

The two senators helped the $42 billion measure clear a key procedural hurdle on Tuesday, setting it up for final passage.

They understand "we don't have time to play games" anymore, Obama said.
The measure is expected to create 500,000 jobs, according to a summary of the bill from the Senate.

Among other things, it would authorize the creation of a $30 billion fund run by the Treasury Department that would deliver ultra-cheap capital to banks with less than $10 billion in assets.

The idea is that community banks do the lion's share of lending to small businesses, and pumping capital into them will get money in the hands of Main Street businesses.

Obama said he is "grateful" that Congress is now on the verge of passing the bill -- which had been stalled until the two senators broke from GOP leaders -- but he added that it "should not have taken this long."

The president also said Republican leaders are holding "middle class tax cuts hostage" by refusing to sign on to his plan to allow the Bush tax cuts for wealthier Americans to expire.

Bush tax cuts: What you need to know
Republicans have repeatedly expressed their opposition to any tax hikes in light of the weak economic recovery. They've asserted that allowing taxes to rise on those making over $250,000 would result in a hit on small businesses.

All of the Bush tax cuts are currently set to expire at the end of this year.
--CNN's Alan Silverleib and Catherine Clifford contributed to this report.

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High supply, low demand: Oil prices under pressure

NEW YORK ( -- As the U.S. dollar gains strength and crude inventories remain high amid low demand, oil prices are coming under pressure.

Prices are down slightly this week, sinking 1% Wednesday after the Japanese government announced it would sell yen and buy U.S. dollars in an attempt to rein in its rising currency.

The nation's move to intervene in the currency markets pushed the greenback up more than 3% versus the yen early Wednesday, sending oil -- which is priced in U.S. dollars -- sharply lower.

Supply glut?: Meanwhile, traders continued to worry about a glut in inventories.
A report late Tuesday from the American Petroleum Institute showed an unexpected build in crude supplies last week, while the more closely-watched inventory report from the Energy Information Administration showed that supplies fell.

The EIA said crude inventories, which remain "above the upper limit of the average range for this time of year," fell 2.5 million barrels last week, slightly more than the 2.25 million-barrel drop that analysts had forecast.
Despite a weekly dip in supplies, oil inventories are hovering at the highest levels since the 1990s, said James Williams, president of WTRG Economics.

What peak oil? Why an oil glut is ahead
"Our inventories across the board are very strong, and in addition to that, this is one of the two low demand seasons of the year -- when driving season is over and the heating season hasn't started," said Williams. "So the overall fundamentals point to lower prices."

Pipeline replacement: Expectations that a 670,000 barrel-a-day pipeline, shut over the weekend by Enbridge Inc., would soon resume normal service also pressured prices.

The pipe runs from Wisconsin to Indiana and is one of three pipelines owned by Enbridge that has been closed this summer due to leaks. The closures have caused gasoline prices to spike throughout the Midwest.

"It doesn't look like it's going to be long before they have this one back up," said Williams. "After taking into consideration the oil diverted through other pipelines around it, we're talking about a net loss of about a quarter of a million barrels a day, so that being replaced is helping prices move lower."

Economic jitters: On top of high supply levels and a stronger dollar, concerns about the global economic recovery haven't gone away. As economic reports about the U.S. economy and abroad continue to send mixed signals, oil will likely hover in a range of $70 to $80 for the rest of the month.

"Crude oil moves with the stock market, and you have a market that has a lot of uncertainty in it," said Williams. "One day it's 'Oh, everything's going to be better," and the next day you read about housing sales or something else and you think, "Oh no, this will never stop.'"

"Clearly we're in anything but what you would call a solid recovery, and the biggest threat to oil prices is a double-dip recession," he added.

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Tuesday, 14 September 2010

Gold glitters at record high

NEW YORK ( -- Gold surged to a new record high Tuesday, as uncertainties about the global economy sent some investors flocking to the save-haven precious metal.

Gold futures for December delivery, the most actively traded contract, rose $24.60, or 2%, to settle at a new record high of $1,271.70. That topped the previous record of $1,264.80 reached on June 21.

Gold is often seen as the ultimate low-risk asset because it is tangible and unlike currencies, it isn't tied to any one country's policies.

A number of global headlines were fueling the flight to safety on Tuesday, said Phil Flynn, senior market analyst with PFG Best.

Investors are concerned about how banks will phase in the new regulations announced in Basel, Switzerland, over the weekend, he said.

They're also using gold as a hedge against the dollar, which fell to a fresh 15-year low against the yen Tuesday, after Japan's Prime Minister Naoto Kan won re-election. Investors have been looking for the Japanese government to jump in to limit the currency's rise, as a stronger yen can hurt profits at Japan's export businesses. Kan has resisted pressure to do so.

Adding further fuel to the fire, Flynn called out reports showing declines in gold production from Russia -- among the top producers in the world.

"If you ask five people on the street why they're buying gold, five people could give you a different reason," Flynn said. "If you're worried about a weak dollar, you buy gold. If you're worried about bank failures, you're buying gold. If you're worried the global system is going to collapse, guess what? You buy gold."
Gold rose to record highs earlier this year as fears about Europe's sovereign debt crisis escalated, and in late 2009, gold had surged when investors fretted about a weak dollar and inflation fears.

But while gold prices hit a record on Tuesday, they were still a far cry from their real peak, as measured in dollars adjusted for inflation.

Gold hit its summit on Jan. 21, 1980, when it peaked at $825.50 an ounce, in 1980 dollars. That translates to an all-time peak of $2,163.62 an ounce in 2009 dollars.
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Would a midterm loss for Democrats boost stocks?


FORTUNE -- While most secular market indicators -- hemlines, sports, the weather -- matter little to big investors, the correlation between midterm elections and rising stock prices is practically gospel. "The charts are eye popping," says Deutsche Bank chief U.S. equities strategist Binky Chadha, who points out that the S&P 500 has produced gains in 18 out of the last 19 midterm election cycles. "It really is an anomaly," he says.

The S&P has returned an average of 13% in the six months after midterm elections, Chadha says, and 17% over the next twelve months, which is vastly better than how it has performed in non-election cycles. The indicator works regardless of which party wins control of Congress, but it's especially strong where there is a Democratic president and Republican legislature. When that scenario is in place, stocks average 14.6% annual returns, according to Bill Stone, chief investment strategist at PNC Wealth Management. "It's the best of all iterations," he says.

With that in mind, many investors are gleefully awaiting this year's midterm elections. The latest Cook Political Report projects that Republicans will gain control of the House and come close to winning back the Senate, pushing Congress into a state of political gridlock (according to Chadha, 70% of midterm elections result in the president losing seats in both chambers).

And gridlock, market experts say, is why midterm elections are good for stocks. The less power a president has, the less likely he is to push an activist agenda, unshackling businesses from the burden of regulatory uncertainty. Or so the theory goes.

But while the indicator has worked in just about every midterm election cycle, some experts fear that political gridlock may fail to provide a boost to stocks this year because of the external factors bogging down the economy. They believe the market is struggling not because of anti-Washington sentiment, but because of fundamentals. "There has to be a more significant intervention in the jobs market than simply letting things play out," says Michael Yoshikami, chief investment strategist at YCMNET Advisors. "The economy is too damaged right now to get away with gridlock."

A regulatory stalemate could not only fail to assist the market but would actually make it worse because it would leave economic problems unsolved. "If politicians are unable to work together, some very important policy decision in taxes and energy may not get made, which would cause damage to the economy," says James Angel, a professor at Georgetown's McDonough School of Business. "Gridlock...will cause us to lose precious time."

Could 2011 hold another government shutdown?
Gridlock enthusiasts counter that, while a split government would slow down the pace of legislation, it would also force both sides to arrive at more centrist solutions. Given the dire state of the economy, it's possible that legislators will have to engage in deal making, says Paul Brace, a political science professor at Rice University. "There tends to be a bipartisan gain to bring benefits to states and districts, and even conservative Republicans tend to get pulled into that game," he says. "One might imagine a response like Clinton's, where he let the government shut down in response to the Republican stalemate."

A divided government could arrive at a more business friendly resolution to the issue of tax cuts. Current rates for capital gains, dividends, and individuals are set to expire soon, a hot-button topic in the midterm elections. "As we see a shift in the political pendulum back to the middle ground...maybe those rates will be raised to 20% as opposed to reverting to 39.6%," says Jeff Kleintop, chief market strategist at LPL Financial.

"It would make a big difference to many investors."
Though Obama's massive healthcare and financial reforms are unlikely to be repealed -- the President would veto such efforts -- they could be weakened in their implementation, Chadha says, benefiting stocks in those sectors.

Such pro-business activity, though, would not directly address the problem of joblessness, which many economists believe is still the main source of the economy's -- and tangentially the market's -- woes. Corporate profits have soared this year, but much of that lift has come from cost cutting and inventory restocking. Continued weakness amongst consumers could slow the pace of the recovery, stifling the benefits of reduced legislative activity.

Jobs, jobs, jobs
Both sides of the gridlock debate agree that the jobs problem needs to be solved before the market can roar again. But they are divided over the role that the midterm elections would play in spurring that recovery.

Those who believe that gridlock will help the market say it will also boost hiring and bolster consumer demand by improving corporate sentiment. "There's been hesitance to commit to long-term capital investments because of legislative change," says Kleintop. Once the horizon is clearer, he says, employers will free up resources and start hiring again.

Interventionists, on the other hand, say that while business leaders may complain about the government's heavy hand, they are sitting on the sidelines for other reasons. "Most of business hiring is, what orders do we see coming in the next there to six months -- not what will Congress do towards the end of next year," says Angel.

Hiring will improve when the outlook for demand improves, he says, regardless of whether gridlock comes to Washington.

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Nokia chairman to step down in 2012

NEW YORK ( -- The shakeup at Nokia continued on Tuesday as the Finnish mobile phone maker announced that its chairman, Jorma Ollila, would be stepping down in 2012.

The announcement comes on the heels of Monday's resignation of Nokia's smartphone business chief Anssi Vanjoki. The revolving door of executives started turning on Friday after Nokia said it had hired Microsoft Corp. executive Stephen Elop to replace Olli-Pekka Kallasvuoits as chief executive.

Ollila had served as chairman for 14 years and oversaw the company's rise to the top of the mobile pyramid. But he also witnessed the Nokia's recent inability to keep pace with rivals like Apple (AAPL, Fortune 500) and manufacturers that chose to implement Google's (GOOG, Fortune 500) popular Android software.

Nokia remains the largest handset maker in the world and commands a 40% of the smartphone market, according to IDC. But the company's devices have yet to take off in the United States -- and IDC expects Nokia's share to drop by about 18% over the next four years as Android and soon-to-be-released Microsoft Windows Phone 7 smartphones grow in popularity. To fight that onslaught, Nokia on Tuesday unveiled a new lineup of upcoming smartphones.

Shares of Nokia (NOK) have tumbled by about 70% since the iPhone was released in the summer of 2007.

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Monday, 13 September 2010

Investors refocus efforts on Treasurys

NEW YORK ( -- Treasury yields eased Monday as investors swung back into U.S. government bonds, reversing the momentum from last week's sharp sell-off that pushed yields to monthly highs.

Yields for Treasurys fell across the board on Monday. The yield on the benchmark 10-year note slipped to to 2.76%, from 2.80% late Friday. The 30-year bond slid to 3.85%, down from 3.87% Friday; the 2-year decreased to 0.54%; and the 5-year edged down to 1.53%. Prices and yields move in opposite directions.

"We're seeing a correction to the reaction we got last week, and a bit of bargain-hunting," said David Coard, head of fixed income trading at the Williams Capital Group, adding that the declines in prices last week make Treasurys more attractive.

Treasury yields charged higher last week, as better-than-expected economic news reduced concerns about a stalling recovery and a double-dip recession.
Coard cautioned that as the economy remains under pressure, treasury yields are likely to continue moving lower.

"The economy is still vulnerable and there is a lot of uncertainty involved," he said. "As long as that's the case, Treasurys will maintain decent demand."

Bond yields rising? Curb your enthusiasm
Coard said he believes the chance of a double-dip recession is higher than the market is currently preparing for, and expects that the 10-year yield will drop somewhere between 2% and 2.25% by the end of the year.

Since Treasurys are backed by the U.S. government, they are considered low-risk investments and are attractive during times of economic uncertainty. But when investors gain confidence in the economy, they typically shift away from save-haven assets and pour money into riskier assets -- like stocks.

"Last week's data revealed that although the economy is weak, it is not collapsing and that allowed investors to breathe a sigh of relief," Coard said.

Last week's $67 billion of debt sales also boosted Treasury yields.
Meanwhile, the bid for government debt Monday was also supported by the Federal Reserve Bank of New York's purchase of $3.4 billion in Treasury debt. The purchase is part of the Fed's plan to reinvest cash back into the bond market to help the economic recovery.

The bank said Monday that it plans to purchase about $27 billion in Treasurys through early October.
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Stocks: Investors find reason to cheer

NEW YORK ( -- Stocks finished higher Monday as new global banking rules, upbeat economic data from China and some acquisition activity helped boost investor sentiment.

The Dow Jones industrial average (INDU) added 0.8% to end at 10,544.13. The S&P 500 (SPX) rose 1.1% to close at 1,121.90, and the Nasdaq (COMP) led the gains with a 1.9% jump to 2,285.71.

Markets around the world gained on news of the global banking agreement. The historic new reform will force financial institutions to more than double their capital reserves as a cushion protecting against future meltdowns.
Stocks posted modest gains in a light trading session Friday, as ongoing worries about the economy dampened enthusiasm over an increase in wholesale inventories.

Several economic reports are on tap for the week, and investors are also likely to focus on tax policy as lawmakers return from recess. Congress is expected to work on possible legislation to extend the Bush tax cuts.

Banking shares get a boost: The bank reform came after top central bankers met in Basel, Switzerland, over the weekend. The new rules would require financial institutions to increase their core capital cushions to at least 4.5% of assets, up from the current 2%.

Banks will have until 2019 before the rules come into full force -- a longer timeline than some had predicted.
But that relief will likely be short-lived, said Steven Goldman, market strategist at Weeden & Co.

"This is more a help for overseas banks rather than the U.S.," Goldman said. "Our markets are riding global stocks higher today, but it won't be sustained."
Bank stocks rallied, and the KBW Bank Index (BKX) soared to close 3.1% higher.
Shares of JPMorgan Chase (JPM, Fortune 500), PNC Bank (PNC, Fortune 500) and BB&T (BBT, Fortune 500) also surged to end up about 3%. Shares of Marshall and Ilsley (MI), based in Milwaukee, leapt 4.5%.

Companies: Hewlett-Packard (HPQ, Fortune 500) announced it has agreed to acquire cyber-security firm ArcSight (ARST) for $1.5 billion, or $43.50 per share -- a 24% premium over the stock's Friday closing price.
Shares of ArcSight surged to end 25.1% higher.
Rental car company Hertz Global Holdings (HTZ, Fortune 500) said Monday that it had raised its offer for Dollar Thrifty Automotive (DTG), to $50 per share, or $1.56 billion. Dollar Thrifty shares rose to close up 5.4%, while Hertz added 7.8%.

In April, Hertz originally offered to pay $1.2 billion to acquire its rival, but competing car rental company Avis (CAR, Fortune 500) later offered $1.36 billion for the company.

Genzyme said it will sell its genetic testing unit to Laboratory Corp. of America Holdings for $925 million. Last month, Sanofi-Aventis went public with an $18.5 billion cash offer for Genzyme, with the French firm hinting it may consider a hostile takeover if Genzyme refuses to talk.

Genzyme (GENZ, Fortune 500) shares closed down by almost 0.8%, while Laboratory Corp. (LH, Fortune 500) was fell almost 5%.
Xerox (XRX, Fortune 500) shares ended almost 8% higher after a favorable article in Barron's said chief executive Ursula Burns is rebranding the copier giant as a data-services provider.

Economy: In a Saturday report, China reported stronger-than-expected growth in its industrial sector in August. Inflation in the country also accelerated last month, driven by rising food prices.

The data spurred China's central bank on Monday to set the yuan's daily reference rate at its highest level against the dollar since it scrapped its peg against the greenback in 2005.

China's inflation battle intensifies
New pressure has been building on China to let its currency increase in value. Treasury Secretary Timothy Geithner told The Wall Street Journal that China's decision in June to end its peg to the dollar was an "important step ... but they've done very, very little ... in the interim."

The Treasury Department released August budget numbers, which showed a $90.5 billion deficit in the month, following a shortfall of $103.6 billion in July.
World markets: The Basel bank reform helped European markets finish higher. The CAC 40 in France rose 1.1%, the DAX in Germany climbed 0.8% and Britain's FTSE 100 added 1.2%.

Asian markets ended higher. Japan's benchmark Nikkei index rose 0.9%, the Hang Seng in Hong Kong surged 1.9% and the Shanghai Composite ended 0.9% higher.

Currencies and commodities: The dollar fell against the euro, the British pound and the Japanese yen.

Oil for October delivery rose 74 cents to settle at $77.19 a barrel after a leak forced officials to close a Chicago-area pipeline.
Gold for December delivery gained 60 cents to settle at $1,247.10 an ounce.

Bonds: The yield on the 10-year Treasury note fell to 2.74% from 2.81% late Friday. Bond prices and yields move in opposite directions.

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Plan to end oil industry tax breaks draws fire

NEW YORK ( -- The debate over eliminating tax breaks for the oil and gas companies is heating up, with an industry group saying Monday that the move could cost the energy sector thousands of jobs.

President Obama signaled last week that his administration could pay for $180 billion in recently proposed economic recovery measures by closing tax loopholes for major corporations, including tax breaks and subsidies for oil and gas producers.

However, the proposed tax changes could have "grave economic consequences," according to a study from the American Energy Alliance, which lobbies for the oil and gas industry.

The study, based on research from Louisiana State University economist Joseph Mason, says the proposed changes will trigger an initial loss of 154,000 jobs in the energy sector and related fields by the end of next year.

In addition, the changes would result in more than $340 billion in lost economic output, and $68 billion in lost wages nationwide, according to AEA and Mason.
"The Obama administration aims to single out U.S. oil and gas firms and raise the cost of energy for consumers by eliminating crucial tax credits to which all taxpayers are entitled," Mason said in a statement.

The proposals that the industry objects to are an elimination of a manufacturing tax credit and a modification to the rules for "dual capacity taxpayers," which are primarily oil and gas firms that make "tax like" payments to foreign governments.
According to research from Concept Capital, ending the manufacturing credit would add $15 billion to the federal coffers, while changing the dual capacity rule would raise $8.5 billion. The administration has proposed using that money to offset the cost of new tax breaks for small businesses and infrastructure spending, among other things.

Those who support closing the loopholes argue that the oil and gas companies are among the most profitable in the world, and that the costs could be easily absorbed.

"American taxpayers are currently giving money to BP, Shell, Exxon and others by virtue of these subsidies," said Kert Davies, research director at Greenpeace. "Correcting that and making them pay those costs will allow a more level economic discussion."

Behind the war between Obama and big business
In addition, he pointed to the thousands of jobs that could be created by subsidizing the development of alternative sources of energy, which is a stated goal of the Obama administration.

But critics say the changes would unfairly penalize minor energy firms and hurt small businesses that rely on big oil and gas companies for their survival.
Alex Morris, an analyst at Raymond James who covers big oil companies such as BP, said it's hard to say exactly how the proposed changes will impact the industry, although he expects there to be some job cuts as a result.

"Any time you eliminate millions of dollars in tax credits, the loss will have to be made up somewhere else," he said. "At some level, there will be an impact on employment."
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Sunday, 12 September 2010

China's inflation battle intensifies

NEW YORK ( -- Inflation in China accelerated last month, as rising food prices pushed overall prices higher.

The consumer price index increased to 3.5% in August, compared to a 3.3% annual rate in July, China's National Bureau of Statistics reported on Saturday.

The global economy has become increasingly dependent on China's rapid expansion as an engine for growth.
But prices in the fast-growing Chinese economy have been outpacing most western economies; U.S. prices were up only 1.2% over the 12 months ending in July.
That has raised some concerns that the Chinese government might take steps to slow down growth in order to keep prices in check.

"China has to be careful," said Robert Brusca of FAO Economics. "Their big objective is domestic stability, and domestic stability requires employment. But they can't let inflation get away from them. So they have a tiger by the tail."

Separately, China reported that the country's industrial output increased 13.9%.
The increases in Chinese consumer prices have been driven by higher food prices, up 7.5% in the last 12 months. Food makes up about a third of the overall consumer price index in China, compared to only 14% of the official mix of prices in the United States. Fresh vegetables have shot up 7.7% in the last month and further price increases are expected due to a poor wheat harvest in Russia.

There is little the Chinese policymakers can do to control food prices other than provide subsidies, said Virendra Singh, director in international economics for Moody's

But he said there is concern that rising food prices could spill over to the rest of the economy as workers demand higher wages.
So his firm is expecting the People's Bank of China to move soon to raise interest rates.
In fact, the August price report got particular attention when China moved up the release of the data by two days, prompting some to speculate the move was done to give financial markets a chance to digest the news and possibly open the way for the People's Bank of China the chance to raise interest rate.

But Jay Bryson, international economist for Wells Fargo Securities, isn't convinced China is getting ready to raise rates because of uncertainty about the strength of the global economic recovery. And he said even if it does raise rates, the impact will be more symbolic than substantial.

"The Chinese have always had a bias toward growth rather than keeping inflation in check," he said. "[A rate hike] could send a signal that these guys are getting serious about inflation."

The Chinese central bank has left rates unchanged since September 2008 when it cut rates to in the face of the global financial meltdown.

There isn't an overnight lending rate in China comparable to the U.S. Federal Reserve's benchmark fed funds rate, which has been near 0% since December 2008.

By comparison, the People Bank of China's one-year lending rate has been at 5.31%, but that relatively lofty rate has done little to slow the economy overall.

China's gross domestic product, the broadest measure of the size of the economy, was up 10.3% in the second quarter compared to a year earlier.

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New year, no federal budget

NEW YORK ( -- On Oct. 1, just three weeks after lawmakers return from their summer break on Tuesday, fiscal year 2011 will begin. But Congress will not have a new budget in place by then. And it may not materialize anytime soon.

It won't be the first time. In fact, tardy federal budgets have been par for the course for most of the past 35 years.

"It's pretty inexcusable even though we excuse it every year. There's no reason on earth why [lawmakers] shouldn't be able to make up their minds before the start of the fiscal year," said Rudolph Penner, a former Congressional Budget Office director who is now public policy scholar at at the Urban Institute.

Without a formal budget, Congress typically ends up passing so-called "continuing resolutions" for a month or two at a time. That essentially prevents the federal government from shutting down while lawmakers finalize how money will be allocated in the fiscal new year.

The CR authorizes the heads of government agencies to obligate money they need to spend to carry out their agencies' work, whether through signing contracts, making purchases or hiring people.

It's hardly optimal, however. "It has implications for good government. Civil servants can't do their work very efficiently. It's hard to do rational planning," Penner said.
Given the poisonous partisanship that has dominated this mid-term election year, it's easy to wonder if they can even pass a continuing resolution. If they don't, a government shutdown is a real possibility. But Penner believes that is unlikely because it would be deeply unpopular and both parties could suffer politically.
By the same token, Penner can envision a scenario where Congress doesn't finalize a formal budget until sometime after January. If the Republicans win the majority in the House, they may be unwilling to pass anything until they take over, he said.
Why this year is different
While it's not unusual for Congress to ring in the new year budget-free, there's a somewhat new twist in the old procrastination dance this year.
That's because neither the House nor the Senate have even passed a formal budget resolution, which typically is done in the spring before the appropriations committees decide how to allocate federal funds.
The budget resolution sets caps for spending, establishes revenue targets and generally serves as a five- to 10-year blueprint of congressional priorities for the appropriations and tax committees to follow.
Nonetheless, it's not like no work has been on a budget. To date, the House has passed two of the 12 appropriations bills for 2011. The Senate hasn't passed any, but a number have been passed by the subcommittees charged with running the purse strings for different areas of the government, such as education and defense.
But it's a long way from the finish line for legislators. And there is still no consensus within or between the House and Senate on what the specific cap should be on discretionary spending for next year, although they are working within a range of $1.114 trillion to $1.121 trillion, and there's a push to move those levels down to $1.108 trillion.
All told, the CBO estimates that the 2011 budget will total $3.7 trillion based on policies that were in place this summer. A little less than a third of that would go to discretionary spending and the rest would go to entitlement programs such as Medicare and interest on the country's debt.
Long-term debt: The real problem
And that debt is the elephant in the room in all budget discussions.
There may be a wait-and-see attitude at play, since the president's bipartisan fiscal commission will release its recommendations for reining in the debt on Dec. 1, and if any of its suggestions are adopted, that will change any budget plans on tap.
But even if lawmakers could agree on a comparatively modest budget, lawmakers would need to detail how it would affect the country's debt over the next decade. And the debt picture would be ugly no matter what. So voting on that budget would be a political downer right before an election when everyone is trying to show how fiscally irresponsible the other guy is.
"No one wants to spell out what they would do given that the choices are humongous deficits or tough policy choices, all in an incredibly tense election year," said Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget. "The budget never really had a chance. And another sad truth -- most of the public will never even notice."

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New bank rules to curb risk

NEW YORK ( -- Global officials meeting in Switzerland Sunday announced new guidelines to strengthen the financial system by forcing banks to set aside more capital.

The goal is ensure that banks have bigger reserve cushions when things go bad and avoid another bank meltdown like the panic of 2008, which led to widespread credit gridlock and fueled the recession.

At the same time, the rules attempt to walk a delicate balance: Forcing banks to stash too much too soon in "rainy day funds" could crimp their ability to lend -- at a time when global credit has already contracted dramatically.

The effort was led by the Basel Committee on Banking Supervision, which is made up of officials from 27 countries including the United States. Federal Reserve Chairman Ben Bernanke and Federal Deposit Insurance Corp. Chairman Sheila Bair were among attendees from the U.S. government.

U.S. regulators said Sunday that the new guidelines would make the banking system more stable by curbing risk.

Bank crisis still in fifth inning
"The agreement represents a significant step forward in reducing the incidence and severity of future financial crises," the Fed, FDIC and Office of the Comptroller of the Currency said in a joint statement.

The new rules, known as Basel III, will be enforced by local bank watchdogs like the Fed and FDIC and will take effect over a period of years after being adopted by each country.

The reforms will increase the minimum core capital cushion -- the funds banks accumulate by selling stock and retaining profits -- to 4.5% of assets from the current 2%. In addition, banks will have to set aside another 2.5% for "future periods of stress."

"The agreements reached today are a fundamental strengthening of global capital standards," said Jean-Claude Trichet, president of the European Central Bank.

Phase-in period: Under the agreement, the United States and other nations would be required to start implementing the new standards on Jan. 1, 2013. The stricter capital requirements would be phased in over two years to avoid putting too much stress on banks.

The phase-in will reduce "the potential for ... short-term pressures on the cost and availability of credit to households and businesses," U.S. regulators said.

Basel III, which will apply everywhere, was the subject of intense lobbying. Big banks in Japan and Europe, which tend to be less robustly capitalized than those in the United States and the United Kingdom, were particularly aggressive.

Shares of European banks tumbled last week as investors worried about the impact of the new requirements. But the new rules may not have an immediate impact on the likes of Bank of America (BAC, Fortune 500) and JPMorgan Chase (JPM, Fortune 500), which have amassed significant capital over the last few years and boosted profits.

The policies were developed based on lessons from the financial crisis in 2008. As the bubble in home prices burst, banks suffered billions of dollars in losses on mortgage-related assets. Those losses proved fatal for some banks, namely Lehman Brothers, when liquidity dried up and investors panicked.

Earlier this year, President Obama signed a far-reaching Wall Street reform bill that gives regulators more clout to come down hard on banks they think are engaging in overly risky lending.

- Fortune's Colin Barr and CNNMoney's Ben Rooney contributed to this report.

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Thursday, 9 September 2010

Yahoo: Can this tech company be saved?

NEW YORK ( -- Does anyone care about Yahoo anymore?
Sure, Yahoo (YHOO, Fortune 500)

Still has a boatload (to use a favorite term of Yahoo CEO Carol Bartz) of users. I still go to Yahoo Finance a lot, for example. Ditto for Yahoo Mail. And I do love Yahoo's fantasy sports sites.

But this isn't 1998 anymore. Being a portal doesn't make you a leader. Having eyeballs doesn't necessarily make you a financial or technological juggernaut.
While rivals like Google (GOOG, Fortune 500), Facebook and Apple (AAPL, Fortune 500) continue to innovate in the worlds of search, social media and mobile, many wonder just what Yahoo is other than a slightly bigger version of AOL.

And heck, even AOL (AOL), which may get a slightly worse rap than warranted due to its former role as an albatross around the neck of my corporate parent company Time Warner (TWX, Fortune 500), has done a decent job of differentiating itself from the competition lately thanks to a keen focus on local content.

So it's no wonder that Yahoo's stock continues to slump. The stock is down 18% this year and is only 7% above its 52-week low.

A post I noticed on StockTwits about Yahoo sums up the company's sorry state the best. "The only worse thing than being talked about is not being talked about. $YHOO," tweeted Eric Jackson, managing member at Naples, Fla.-based hedge fund Ironfire Capital on Wednesday evening.

This is a pretty damning comment from someone who has followed the company very closely. Ironfire owned a position in Yahoo a few years ago and began pushing the company to get rid of former CEO Terry Semel in late 2006. That wound up happening in June 2007.

Jackson also wanted the company to accept Microsoft's (MSFT, Fortune 500) takeover offer in February 2008. But Yahoo spurned the deal, even though it valued Yahoo at a 61.6% premium at the time. So Ironfire sold its position a few months later.

I caught up with Jackson on the phone Thursday to get more of his thoughts about what the company could do to reclaim its former glory.

Jackson said that the biggest problem is that there doesn't seem to be a focus on any specific type of product or area of technology.

"It struck me the other day how little we've heard about Yahoo in the past six to 12 months," he said. "That symbolizes how the company is not as relevant with where the world is moving, especially with respect to mobile and social media. The company seems to be adrift."

Yahoo, to its credit, has done a lot since Bartz joined in January 2009 to become leaner and meaner in order to get profits back on track. The company's net income increased by 40% last year even though revenues slipped.

Google launches live-updating 'Instant' search
But the cost-cutting may have come at a price. Yahoo now lacks strategic vision, Jackson said. He thinks Bartz was the right person to whip Yahoo into shape in the short-term but that a new CEO might do a better job of actually engineering a sustainable turnaround.

I think he's right. Yahoo's total sales are expected to be flat this year and analysts are only forecasting a 4% rise in 2011. That's anemic for an "old media" company, let alone a "new media" firm like Yahoo.

The best you can say about Yahoo these days is that it has done a decent job of partnering with, and occasionally even outsourcing functions to, other relevant companies.

Hence, links to Facebook and Twitter on Yahoo's home page. And the decision to let Microsoft's Bing power search results on Yahoo and give up control of its job listing service HotJobs to Monster Worldwide (MWW).

But Yahoo can only go so far by relying on the help of rivals. Even if companies like Facebook and Microsoft represent, to use an ugly bit of jargon, co-opetition as opposed to true competition, Wall Street is not going to get excited about Yahoo until it can find a way to really get sales growing again.
"The main part of Yahoo is languishing. Another shakeout is needed and warranted. Yahoo has to go beyond hacking away at things and focus on new products," Jackson said.

- The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of, and Abbott Laboratories, La Monica does not own positions in any individual stocks. To top of page

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Stocks end higher after light trading day

NEW YORK ( -- Stocks posted tepid gains, down slightly from their earlier rally Thursday as investors mulled over better-than-expected reports on the U.S. trade deficit and weekly jobless claims.

At the closing bell, the S&P 500 (SPX) was up 5 points, or 0.5%, to 1,104, the Nasdaq (COMP) Composite climbed 7 points, or 0.3%, to 2,236, and the Dow Jones industrial average (INDU) rose 28 points, or 0.3%, to 10,415.

Earlier in the session, the Dow had gained as much as 51 points.
All three major indexes started the month with a bang following a series of stronger-than-expected economic reports. But this week, trading has been a bit shaky, with little on the docket to push stocks forward.

Trading volume is 30% below the 3-month moving average, which is not unusual for the shortened holiday week following Labor Day. Nevertheless, that lackluster volume means none of this week's stock market moves amount to much, said Art Hogan, chief market strategist at Jefferies & Co.

"Whatever happens, it doesn't clarify anything in investor's minds. We will have to wait until next week," he said. "That said, it's intriguing that as early as two weeks ago the economic calendar was working in the wrong direction. All we could talk about was a double dip. That has gone the way of the dodo bird now."
Stocks closed higher Wednesday as worries about European banks eased, and investors welcomed President Obama's $350 billion jobs recovery plan.

Economy: The Labor Department's weekly report on initial jobless claims showed that 451,000 first-time claims for unemployment benefits were filed in the week ended Sept. 4. This was significantly less that consensus forecast from of 470,000.

The latest figure was down 27,000 from an upwardly revised 478,000 in the previous week.

Also, the Commerce Department reported that the U.S. trade deficit slipped to $42.8 billion in July, sharply lower than the consensus forecast of a $47.3 billion deficit. It also marks a decline from the slightly revised deficit of $49.8 billion for the prior month.

BWF Financial analyst Hamed Khorsand said the jobless claims number was a bigger driver than the trade figures. "Even though employment is really a lagging indicator of the economy, it's gotten to a point where it's now setting the sentiment," he said.

Companies: Shares of Adobe Systems (ADBE) surged more than 12% after Apple (AAPL, Fortune 500) said it will drop restrictions on what programming tools developers can use to create iOS apps. Shares of Apple rose 0.6% after the news.

McDonalds (MCD, Fortune 500) said its global same-store sales rose 4.9% in August, boosted by its sales of smoothies and frappes. But the sales increase fell short of economists' forecasts and shares of the fast-food giant fell 2.3% on the news.

Goldman Sachs (GS, Fortune 500) rose 1.1% after Britain's Financial Services Authority said the firm agreed to pay a $27 million fine for not disclosing a U.S. government investigation into the the allegedly fraudulent activity of Fabrice Tourre, a London-based Goldman trader.

U.S. losing competitive edge
World markets: European shares rose. Both the CAC 40 in France and Britain's FTSE added 1.2%, and the DAX in Germany gained 0.9%.
Asian markets ended mixed. Japan's benchmark Nikkei index rose 0.8%, and the Hang Seng in Hong Kong edged up 0.4%. The Shanghai Composite tumbled 1.4%.

Currencies and commodities: The dollar rose against the euro, British pound and the Japanese yen.

Oil futures for October delivery fell 42 cents to settle at $74.25 a barrel.
Gold for December delivery fell $6.60 to settle at $1,250.90 an ounce.
Bonds: The yield on the 10-year Treasury note rose to 2.76%, from 2.65% late Wednesday.

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When Chrysler could have sold for $1

FORTUNE -- One of the lesser-known stories of the Obama Administration's auto bailout is how close Chrysler came close to following the fate of Lehman Brothers and being allowed to fail.

A majority of the Treasury Department's auto task force actually voted in favor of withholding further aid from the automaker. And it was only after a tense 45-minute meeting in the White House that President Obama agreed for the federal government to rescue Chrysler.

An insider's account of the Chrysler drama is recounted by Steven Rattner, head of the auto task force, in a new book Overhaul, to be published in October by Houghton Mifflin Harcourt. (I've covered his account of the revolving door at GM's corner office in a previous column.)

The story began to unfold in October 2008. After General Motors went hat in hand to the government for help, Chrysler followed a week later, signaling that it was desperate for cash.

Chrysler chief Bob Nardelli testified before the Senate Banking Committee on November 18, along with his two fellow CEOs, and again on December 8, looking for $7 billion to keep the company afloat.

After the Senate failed to act, Nardelli wanted Treasury to force GM to buy Chrysler. But although Chrysler's Jeep brand, minivan franchise, and full-size pickup business were attractive, GM decided that the overlap of brands and dealers would make a merger too cumbersome.

No merger in sight
With no progress on the merger front, Rattner reports that Steve Feinberg of Cerberus Capital, Chrysler's owner, called Treasury Secretary Henry Paulson at 2 a.m. on the morning of December 19th with an incredible offer: He proposed turning Chrysler over to the U.S. government for $1. Rattner says the Treasury team mistook Feinberg's offer for a joke and didn't respond.

Later that month, President Bush authorized $17.4 billion in TARP money for GM and Chrysler. White House staffers had bought the president a weed whacker for Christmas the year before. In 2008, they joked that they bought him Chrysler.
The automaker was worth more alive than dead. Liquidation would yield just $1 billion. But Chrysler's problems -- loss of market share, overwhelming structural costs, outflows of cash -- were staggering. The auto task force created by new President Obama figured bankruptcy was inevitable.

By the time the auto team met with White House chief of staff Rahm Emanuel in the West Wing, they doubted whether Chrysler should be allowed to continue to survive as an independent entity. Emanuel was characteristically blunt: "Why even save GM?" he asked, according to Rattner. Reminded of tens of thousands of autoworkers whose jobs were at stake, he barked out "Fuck the UAW."

In addition to GM, Nardelli had reached out to Ford and Carlos Ghosn of Renault-Nissan for help, but to no avail. Lacking new designs and unable to meet tightening fuel economy standards, it pinned its hopes on a prospective alliance with Fiat. But when it presented a plan to Treasury on February 25, it provided only sketchy details and no scheme to reduce a heavy $6.9 billion debt burden.
Rattner met with Fiat Sergio Marchionne a few days later. Asked if he would put up capital as part of the deal, Marchionne said the equivalent of "No way."

On March 13, the auto task force met to decide Chrysler's fate. Those who opposed further aid argued that its demise would improve the odds of survival of GM and Ford because most would-be Chrysler buyers would shift to other domestic brands. By one analysis, GM would capture 300,000 additional customers -- a quarter of Chrysler's business -- if Chrysler failed. That would increase GM's profit by $2.4 billion and add $10 billion to its market value.

300,000 jobs at stake
A Chrysler liquidation would vaporize 300,000 jobs industry wide including 40,000 at Chrysler. But some argued that the loss would be minimized as others filled in the gap. Besides, continuing to bail out Chrysler would send the wrong signal about the administration's willingness to make hard decisions.

In the end, the argument to save Chrysler was based more on political and social reality. Saving the automaker would prevent the loss of those 300,000 jobs and President Obama being blamed. Ripple effects might include Michigan's state unemployment fund going broke.

White House Chief Economic Adviser Larry Summers said it was better to invest $6 billion in Chrysler's survival than pay several billion for its funeral. He and others praised a Fiat merger, in part because it would preserve the future opportunity to merge with GM.

Summers pressed the task force members to apply probabilities to their projections. He asked for a show of hands: If you assume the probability of saving Chrysler for five years is 50%, would you save it? The task force members voted four to three against it. Rattner couldn't make up his mind but eventually voted in favor of a bailout. Summers had the tie-breaker and said yes as well.
A memo with the arguments for both sides was prepared for Obama. An entire session of the morning daily briefing on March 26 was set aside to discuss it. After 20 minutes, the president decided the decision was too important to rush and delayed it until evening.

Meeting in the Roosevelt Room of the White House, Obama heard arguments for 45 minutes. Polling data was discussed showing public opposition to the bailout, as was the impact of Chrysler's failure on unemployment. At the end of the meeting, Obama asked "Does anyone else have anything to say?" And then he decided. "I'm prepared to give Chrysler 30 days to see if we can get the Fiat deal done on terms that make sense to us."

Chrysler went through bankruptcy so its debts could be eased and it could continue in business. And negotiations with Fiat turned out to be tougher than expected -- due in part to Marchionne's explosive temper --- but it finally went through and the automaker was saved. But for a long time, its survival hung by the narrowest of threads
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Wednesday, 8 September 2010

Health insurer faces $9.9 billion in fines

NEW YORK ( -- California regulators are seeking fines of up to $9.9 billion from Pacificare over allegations the health insurer mismanaged claims from physicians, failed to make payments in a timely manner and other violations.

The California Department of Insurance alleges that Pacificare, which was bought by UnitedHealth Group in 2006, violated the state's insurance code 992,000 times between 2006 and 2007.

Each of those violations carry a fine of up to $10,000 each, according to CDI spokesman Ioannis Kazani.

The National Association of Insurance Commissioners said the $9.9 billion fine, if enacted, would be the largest the group has seen.

In court documents filed last year in Sacramento, CDI says an investigation in 2007 found that Pacificare routinely failed to disclose all benefits, coverage, time limits or other provisions in insurance policies. It also found claim files were often missing certain documents and that payments were not made on time.
The allegations have been the subject of an ongoing hearing conducted before an administrative law judge, who is reportedly nearing a verdict after nearly 10 months.

The California Insurance Commissioner, Steve Poizner, who filed charges against Pacificare in 2008, will make the agency's final decision on the fines following the judge's recommendation.

Special Report: Fixing Healthcare
Pacificare and UnitedHealth (UHC) dispute the state's claims, saying regulators have inflated the fines to score political points ahead of election season.
"The inflated figure has no basis in reality," said UnitedHealth spokesman Tyler Mason. "The largest fine in department history [that] we're aware of was $8 million for alleged behavior far more egregious than the supposed issues here."
This is not the first time Pacificare has been fined by state regulators. In 2008, the Department of Managed Health Care, another California regulator, fined the company $2 million over more than 130,000 alleged claims handling violations.
In this current case, analysts doubt that Pacificare will ultimately pay the maximum $9.9 billion fine.

"The '$9.9 billion' figure does not represent (or come close to representing) a reasonable basis for the possible liability, in our view," Matthew Borsch, an analyst at Goldman Sachs, wrote in a research report. "Our understanding is that the vast majority of the alleged violations are technical and/or administrative in nature."
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What peak oil? Why an oil glut is ahead

FORTUNE -- In May, less than a month after the blowout of the Deepwater Horizon oil rig in the Gulf of Mexico, a key milestone was achieved with little notice: Total U.S. supplies of petroleum and products refined from it (including the Strategic Petroleum Reserve) surpassed 1.8 billion barrels, reaching the highest level in the last 20 years. Since then the total has continued to edge upward, hitting 1.87 billion barrels in the week ended August 27, according to the Energy Information Administration.

Despite the Iraq War and the resulting production disruptions, despite the moratorium on drilling in the Gulf, despite turmoil in Nigeria and ongoing cross-border transshipment quarrels in Central Asia and the multiple, repeated declarations that "peak oil" has arrived and supplies will inevitably dwindle, the United States has more petroleum on hand today than it has had since at least the beginning of the first Gulf War.

Part of that surplus comes from increased oil and gas production, particularly from ongoing production in the non-OPEC countries (including the U.S., where a "shale gas boom" has created a natural-gas glut). It also comes from flat demand due to the stumbling economic recovery and changing consumer behaviors. Neither of those factors is guaranteed to last. But as the summer driving season passes and students head back to school, awareness has gradually dawned that we may be looking at an oil surplus for years to come.

"In the last 18 months we've seen this big trend emerge," says David Kirsch, research director at PFC Energy in Washington, D.C. "We spent five to 10 years in a supply-constrained market, characterized by the growth of the BRIC countries [Brazil, Russia, India and China] and concerns over the security of supplies."

Now, Kirsch remarks, because of the financial crisis and the time it will take to pare down the debt of the major OECD nations, demand growth over the next decade is likely to be lower than previously forecast.

A new forecasting model
Official estimates of future oil supplies don't yet reflect this emerging consensus. Believing that "world oil prices will rise slowly as world oil demand increases because of projected global economic growth, slower growth in non-OPEC oil supply, and continued production restraint by members of the Organization of the Petroleum Exporting Countries (OPEC)," the EIA forecasts that the spot price for West Texas Intermediate crude will start climbing again, averaging $81 per barrel in the fourth quarter of this year and $84 per barrel in 2011.

If government experts are wrong, though, we could see persistent surpluses and an oil price drifting toward $50 a barrel or even lower -- far below the $75-per-barrel that King Abdullah of Saudi Arabia called a "fair price for oil" last year. Economists and policymakers have only begun to contemplate what that means.
New oil supplies are coming primarily from Central Asia and Iraq, where nearly a dozen major contracts have been finalized with foreign producers in 2010. The largest prize is the Rumaila Field, in southeast Iraq near the head of the Persian Gulf, with proven reserves 18 billion barrels. BP and China National Petroleum have signed a contract to jointly develop Rumaila.

A report from the U.S. Special Inspector General for Iraq Reconstruction, issued in July, said that Iraqi production, currently around 2.4 million barrels per day (bpd), could reach 12 million bpd by 2017. Saudi Arabia currently produces around 8 million barrels a day.

In Central Asia, the grandiose predictions for the Caspian Sea basin heard in the late 1990s - "another Saudi Arabia" - are finally approaching reality. Kazakhstan, home of the two largest oil finds in recent decades -- the super-giant Tengiz and Kashagan fields - is building more pipeline capacity heading east, to the vibrant markets of East Asia, rather than west, through the tangled pipeline politics of the Caucasus.

Even Israel, long one of the biggest oil importers in the Middle East, is getting into the act. Last year the U.S. Geological Survey reported that Israeli waters in the Eastern Mediterranean contain more than 120 trillion cubic feet of recoverable gas reserves -- and new discoveries have added another potential 24 trillion or so since that report came out.

Questioning peak oil
At the same time, consumers have finally responded to higher gas prices and, perhaps, concern over the environmental impacts of burning fossil fuels. Miles driven by U.S. motorists have fallen over the last couple of years for the first time since such statistics have been collected, indicating that the American love affair with the automobile could be waning. And gasoline demand in China, the world's largest automotive market, may not skyrocket after all, as the government ramps up its drive to replace internal combustion engines with electric vehicles.

An Israeli economy running on, and exporting, large domestic supplies of natural gas is only the most glaring of the geopolitical game-changers that $50-per-barrel oil would entail. Big growth in Iraq's oil industry would lead that country into discussions, and possible disputes, with Saudi Arabia over OPEC's production quotas. The worldwide gas surplus has already reduced the incentive and ability for Vladimir Putin's Russia to engage in power games with gas importers in Eastern Europe. And, of course, cheaper oil from non-OPEC nations could limit the political focus in the U.S. on foreign oil supplies -- and reduce Congress's urgency to pass a comprehensive clean-energy bill.

More than anything, though, the looming oil surplus calls into question the concept of peak oil, at least in the near future, along with the whole science of forecasting future oil supplies. Adam Brandt, a professor at Stanford's Department of Energy Resources Engineering, released a study last month examining the various models that have been used to predict the future of world oil supplies. "Data do not support assertions that any one model type is most useful for forecasting future oil production," Brandt concludes. "In fact, evidence suggests that existing models have fared poorly in predicting global oil production."
In other words, get ready for $50 oil.

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