Oil hits new 6-month high above $66

Oil prices extended a rally to above $66 a barrel Friday to hit a fresh six-month high, after the U.S. reported a fall in oil inventories and further signs of an improving economy.

OPEC oil ministers, who on Thursday agreed to leave production levels unchanged, expected the rally to continue until 2010. "I think that by year end we will see $70 to $75," Abdalla Salem El Badri, secretary general of the Organization of the Petroleum Exporting Countries, said Friday in Vienna.

Benchmark crude for July delivery was up $1.16 cents to $66.24 a barrel by late morning in Europe in electronic trading on the New York Mercantile Exchange. On Thursday, the contract rose $1.63 to settle at $65.08, a six-month high and almost double the lows reached in March, when it fell below $35 a barrel.

The Energy Department's Energy Information Administration on Thursday said U.S. oil supplies dropped unexpectedly by 5.4 million barrels last week. Though crude inventories remain near 19-year highs, it was the third week in a row that supplies have fallen.

Investors were also cheered by signs the U.S. recession may be bottoming out. The government reported Thursday that demand for big-ticket manufactured goods in April had its biggest jump in 16 months, while separate data showed the number of newly laid-off people requesting jobless benefits fell last week.

"We've got a lot more optimism about the economic outlook than we did," said Toby Hassall, an analyst with Commodity Warrants Australia in Sydney. "The market is factoring in a recovery in demand by the end of the year."

"But there's no real evidence that demand is picking up at this point."

OPEC's announcement to keep output levels unchanged was widely expected and did not weigh on prices. It had made production cuts totaling 4.2 million barrels a day between September and January, but has kept output steady since then.

El Badri, speaking to reporters a day after the meeting, said OPEC would be careful "not to take any negative decision" to hurt the chances of economic recovery. He even held out hope of output increases "if the price goes high" and if stockpiles diminish too much -- but declined to specify what a "high" price would be.

Analysts at JBC Energy noted in a report, however, that "supply is still exceeding demand with oil inventories around the world close to record highs" and that a further output cut is still possible.

In other Nymex trading, gasoline for June delivery rose 1.8 cents to $1.93 a gallon and heating oil gained 3.45 cents to $1.64 a gallon. Natural gas for June delivery was up 12.9 cents at $4.09 per 1,000 cubic feet.

In London, Brent prices rose 92 cents to $65.31 a barrel on the ICE Futures exchange.

Starbucks Pushing Landlords for 25% Cut in Cafe Rents

Starbucks Corp., the world’s largest coffee-shop operator, is pushing some U.S. landlords for as much as a 25 percent reduction in lease rates, taking advantage of a declining real estate market to save on rent.

Faith Hope Consolo, chairman of New York-based Prudential Douglas Elliman’s retail leasing, marketing and sales division, is generally advising about a dozen landlords to work with Starbucks after they received letters seeking rent reductions of 20 percent to 25 percent. She hasn’t seen the correspondence.

Separately, two other letters were confirmed by two property managers, who declined to be named because the negotiations are still under way.

“In this environment, what we’ve seen in general is the landlords and the retailers really have to work together more closely to prevail,” Consolo, 50, said in a May 27 telephone interview. “We’re talking a lot about tenant retention.”

Starbucks began rent-reduction efforts in January as part of a plan to trim overall expenses, according to Tara Darrow, a spokeswoman for the Seattle-based company. The same month, the company said it would close about 300 cafes this year and cut as many as 6,700 jobs after first-quarter profit plunged 69 percent, hurt by an economy in which cost-conscious consumers cut back on premium coffee.

Labor, Food Costs

Starbucks is looking to trim labor, food and other costs, and had cut $195 million through the first half of fiscal 2009. In April, the company said it was on pace to lower total costs by $500 million in the fiscal year that ends in September.

Darrow wouldn’t confirm the size of the reduction the company is asking. She also wouldn’t specify how many leases the company is trying to renegotiate or how many landlords have agreed to reductions. Starbucks isn’t asking for a blanket rate reduction from the landlords it has approached, Darrow said.

Starbucks rose 11 cents to $13.82 at 9:38 a.m. New York time on the Nasdaq Stock Market. The shares advanced 45 percent this year before today.

“We’re taking advantage of the opportunity in as many cases as we can,” Darrow said. “We feel like it’s a positive program for us. Most of the landlords we’ve worked with have felt it is a mutually beneficial situation.”

The rent-reduction program covers the U.S. stores operated by Starbucks, a number that totaled 7,035 as of March 29. The effort doesn’t include the more than 4,400 U.S. stores in airports, supermarkets and other licensed locations, Darrow said.

Consolo said she’s generally advising landlords to give Starbucks a break in the rent, in the hope that the retailer remains a tenant. Doing so may make sense even in cases where the retailer would be required to continue paying rent if it closed a store.

Longer Leases

“The owner or developer doesn’t want a dark store,” Consolo said. “It reduces the traffic.”

Rising vacancy rates and falling property values are spurring landlords to offer lower rents in exchange for longer lease terms, said Hudson Riehle, senior vice president of research at the Washington-based National Restaurant Association.

“In this recession, compared with the last one, we do see developers and owners being much more willing to work with the operators to make sure the restaurant remains where it is,” Riehle said. “It’s much more of a partnership than it used to be.”

Commercial real estate values dropped 22.8 percent through March from their October 2007 peak, according to a May 19 report from Moody’s Investors Service. Property prices have fallen 21 percent from a year ago, and Moody’s expects further declines.

Landlords are hoping lower lease rates will allow tenants to remain open, Riehle said. Vacancies at malls and shopping centers climbed to 9.5 percent in the first quarter, the most in a decade, as stores and restaurants closed, according to Reis Inc., a New York-based real estate research firm.

Prime Sites

Quiznos Corp., the closely held toasted-sandwich chain, has been able to reduce rents by 15 percent to 20 percent, often in exchange for signing longer leases, Chief Executive Officer Rick Schaden said in an interview. The Denver-based company has renegotiated as many as 90 leases, including 40 using a team of three outside consulting firms. Quiznos also has grabbed more attractive sites at better prices, including an “A+” site in Denver that hasn’t been available for 25 years, Schaden said.

The phenomenon isn’t limited to the U.S. Brinker International Inc., the Dallas-based owner of Chili’s Grill & Bar, has seen lease rates fall as much as 30 percent in Beijing, John Reale, president of international operations, said in an interview.

S&P places Coeur d'Alene Mines on CreditWatch

Standard & Poor's Ratings Services on Monday placed Coeur d'Alene Mines Corp. on CreditWatch with positive implications, but warned that the mining company may require more funding for its capital spending plan

The ratings, including Standard & Poor's "CCC" corporate credit rating, reflects its assessment that near-term operating cash flow generation will likely increase due to higher metal volumes and continued favorable gold and silver prices, it said.

The Coeur D'Alene, Idaho, company's construction of its Palmarejo mine and start of operation in the first quarter of 2009 are increasing volumes.

"Still, the company's liquidity position remains somewhat thin because its near-term capital spending plan of approximately $70 million will likely necessitate additional external funding," Standard & Poor's said.

The ratings agency said it expects Coeur d'Alene will seek to raise capital through sale leasebacks, gold leases, and other sources over the next several months.

Mitchell Krebs, Coeur d'Alene's chief financial officer, said the company believes its liquidity is adequate going forward. He said the company ended March with over $38 million in cash and expects to generate $100 million in operating cash flow in 2009.

"These combined sources of cash are expected to more than satisfy remaining capital expenditures during the year," he said.

S&P said that if it upgrades the company, "we currently expect it would likely be limited to one notch" because the improvement in its liquidity will likely be marginal until it benefits from increased output and favorable metal prices over time.

Coeur D'Alene's shares ended Monday unchanged at $1.37.

Yahoo CEO: Deal or No Deal, I Can Reignite Growth & Stock

By firmly declaring her willingness to do a deal on search, Yahoo CEO Carol Bartz provided some of the biggest headlines of the first full day of the AllThingsD conference here.

But there was more to the story.

Bartz sat down with me this afternoon. Highlights of our conversation:

* Talks not on fast track: "Negotiations always ebb and flow and right now they¹re in an ebb position. There’s not that much going on,” she said.
* Why a deal hasn't happened to date: "The boatload [of money] hasn't driven to the dock."
* What about her relationship with Steve Ballmer? Been strong for 15+ years, she says.
* The slide in Yahoo's search market share is over: Bartz says Yahoo can certainly hold 20%, possibly grow it.
* Outlook for Yahoo stock and growth: Bartz wouldn't directly address a question about what happens to Yahoo stock if no deal materializes, but she did express extreme confidence she can repeat her performance at Autodesk, whose stock rose more than eightfold during her 14-year tenure and delivered compounded annual sales growth of 13%.

"Given enough time, absolutely Yahoo can match that," she said.

Stay tuned for part II of the interview where Bartz and I discuss her vision for the company and her strategy to meet those ambitious long-term targets.

Lehman Bankruptcy Haunts Stocks With S&P 500 Cheapest to Bonds

By almost any measure, credit markets have recovered most of the losses caused by September’s collapse of Lehman Brothers Holdings Inc. Not U.S. stocks.

The Standard & Poor’s 500 Index, while up 31 percent from its lows, must rise 41 percent to reach its last closing price before Sept. 15, when Lehman filed for the biggest bankruptcy in history, freezing financial markets. Since then, 10-year Treasury notes have climbed 4.6 percent and investment-grade company bonds, which plunged as much as 14 percent, are now down 1.2 percent, according to Merrill Lynch & Co. bond indexes.

The disparity shows that while the U.S. government succeeded in calming markets, stock investors aren’t convinced that the economy and profits will grow fast enough to sustain a bigger advance. Investors are paying the lowest prices on record for equities compared with corporate bonds, based on the earnings yield on the S&P 500.

“Equity investors are still scarred,” said James Dunigan, chief investment officer at PNC Financial Services Group Inc.’s wealth-management unit, which oversees $96 billion in Philadelphia. “Those scars aren’t as easy to heal as they are in the fixed-income market.”

Earnings yield, calculated by dividing the total profit of companies in the S&P 500 by the index’s price, equaled 8.2 percent last week, based on analysts’ earnings estimates for next year. That exceeded yields on U.S. investment-grade bonds by 1.36 percentage points, the widest margin on record when compared with historic profits, monthly data compiled by Bloomberg and Merrill Lynch show.

Stocks Versus Bonds

A stock that pays more in earnings than corporate bonds yield in interest is judged to be cheap by some investors who view profits as the main gauge of returns in equities. Comparing earnings yields to bond payments is a valuation technique used by Warren Buffett, the chairman and chief executive officer of Omaha, Nebraska-based Berkshire Hathaway Inc. and the world’s most successful investor.

Stocks have become even cheaper than debt during the S&P 500’s two-month rebound as corporate bond yields fell by 1.5 percentage points. The gap has widened 0.15 percentage point since the start of March, data compiled by Bloomberg and New York-based Merrill show.

The S&P 500 also trades below its average price-earnings ratio of 16.3 over the past 128 years, the period tracked by Yale University professor Robert Shiller. Based on analysts’ estimates for combined earnings of $72.59 per share for S&P 500 companies next year, the measure would have to increase 33 percent to 1,183.22 to match the historic valuation, according to share-weighted data compiled by Bloomberg.

Lehman, Libor

Unraveling credit markets sparked by the collapse of bonds tied to subprime mortgages triggered bank losses that have grown to almost $1.5 trillion, causing the economy to contract by more than 6 percent in each of the last two quarters, the most since 1958, Bloomberg data show. The recession deepened when New York- based Lehman, then the fourth-biggest securities firm, filed for bankruptcy.

Banks hoarded cash on concern more lenders would fail, causing the London interbank offered rate that banks charge each other for overnight loans to more than triple in a month, while the interest for 3-month loans jumped 71 percent. The difference between Libor and the Federal Reserve’s target rate for overnight lending among financial institutions climbed to 3.32 percent on Oct. 10, the highest since at least 1984.

Investment-grade U.S. corporate debt fell 6.8 percent last year, high-yield bonds lost 26 percent and the S&P 500 plunged 37 percent, including dividends. Ten-year Treasuries returned 20 percent. Securities rated below BBB- by S&P or Baa3 by Moody’s Investors Service are considered below investment grade.

European Stocks Decline; Most Asian Shares Fall on North Korea

European stocks fell on speculation that share prices have outpaced corporate profits after the Dow Jones Stoxx 600 Index traded at the most expensive level in five years. Most Asian shares slid on concern North Korea will step up missile tests.

Danone SA declined 5.8 percent after Europe’s biggest maker of baby food said it is seeking to raise 3 billion euros ($4.2 billion) in a rights offer. Porsche SE slipped 2.4 percent amid speculation the automaker is in danger of losing profits recorded from holding Volkswagen AG options.

The Stoxx 600 slipped 0.6 percent at 8:10 a.m. in London. The gauge has rebounded 31 percent from a 12-year low on March 9, driving valuations for the measure to 24 times the earnings of its companies yesterday, the highest since March 2004.

“We are now in a normal consolidation phase after this very sharp upward movement,” said Petra Kerssenbrock, an equity strategist at Commerzbank AG in Frankfurt. “We are digesting this clearly overbought situation,” she said in a Bloomberg Television interview.

The MSCI Asia Pacific Index slipped 0.1 percent as about four stocks fell for every three that rose.

Futures on the Standard & Poor’s 500 Index were little changed before U.S. markets resume trading after the Memorial Day holiday. Economists project the S&P/Case-Shiller home-price index will show property values in 20 of the largest metropolitan areas dropped 18.4 percent in March from a year earlier, compared with an 18.6 percent decline in February.

Shadow of Lehman

The S&P 500 must rise 41 percent to reach its last closing price before the collapse of Lehman Brothers Holdings Inc. in September, even after a 31 percent rally since March 9.

Danone declined 5.8 percent to 37.33 euros as it raises capital to cut debt and increase financial flexibility. The planned rights offer will be its first in 22 years, according to Chief Financial Officer Pierre-Andre Terisse.

Porsche lost 2.4 percent to 42.70 euros. The automaker that is struggling to combine with VW is also in danger of losing some of the 17.3 billion euros in profits recorded from holding VW options because it may not have the money to exercise them.

Porsche bought options and Volkswagen stock for more than three years and controls more than 70 percent of Europe’s biggest automaker. Now, Porsche may be unable to raise the money needed to cash in the options, according to Sanford C. Bernstein & Co., Sal. Oppenheim jr. & Cie. and FAIResearch GmbH & Co.

Arcandor, LG Electronics

Arcandor AG dropped 4 percent to 1.70 euros after the Financial Times Deutschland reported that the company has shelved talks with Metro AG about a combination of their department-store divisions.

LG Electronics Inc., the world’s third-largest liquid crystal display television maker, lost 1.8 percent in Seoul after Yonhap News reported North Korea may fire more short-range missiles.

President Barack Obama told reporters in Washington that the U.S. “will work with our friends and allies to stand up” to North Korea. The United Nations Security Council agreed to pursue new measures against the communist regime.

North Korea’s first nuclear weapons test on Oct. 9, 2006, sent MSCI’s Asia index down 0.5 percent. The gauge rebounded 0.1 percent the next day and finished the month up 2.9 percent. It rose 3.1 percent in both November and December of that year.

AAA Rating

Rising debt may jeopardize the AAA credit rating of the U.S. in the next three years, New York University economist Nouriel Roubini told Il Sole 24 Ore in an interview.

By this time next year, “the market will realize that potential growth for the U.S. is no longer 3 percent, but is 2 percent or under,” Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said in an interview with Bloomberg Radio.

Separately, Germany’s financial regulator said debts of the country’s banks will blow up “like a grenade” unless the lenders participate in the government’s plan to help them prepare for the credit crunch’s next stage, the Telegraph newspaper reported, citing BaFin President Jochen Sanio.

Honda overtakes Toyota in parts supplier survey

Honda Motor Co. overtook Toyota Motor Corp. as the top company that auto parts suppliers prefer to do business with, according to an annual survey.

Toyota has been the No. 1 automaker among the parts suppliers since 2002, but its ratings have fallen steadily over the last two years, according to a study by Planning Perspectives Inc., a Birmingham, Mich.-based company that surveys manufacturing and service industries. Honda's marks declined from last year as well, though not by as much.

Japanese automakers continued to boast the best relations with their suppliers, with Nissan Motor Co. coming in third among the six automakers ranked. Ford Motor Co.'s supplier relations improved dramatically for the second year in a row, coming in fourth, followed by General Motors Corp. then Chrysler LLC.

"While Ford still has a lot of work to do, what they're doing with their suppliers is working," said John W. Henke, president and chief executive of Planning Perspectives, in a written statement.

Suppliers who work with Toyota complained of a younger, less experienced staff at the Japanese automaker's purchasing group, Henke said. It said Ford's improvement was due to its recent decision to transfer its top European purchasing executive to the U.S.

Ford remains the only automaker among the Detroit Three that has not accepted government aid. Crosstown rival Chrysler is in the midst of bankruptcy protection and many of its biggest creditors are parts suppliers waiting to be paid.

GM, meanwhile, is holding out hope for an out-of-court restructuring. If faces a deadline at the end of the month to get its bondholders -- who hold $27 billion in debt -- to take a 10 percent equity stake in the company. If it is unsuccessful, it will likely file for bankruptcy protection.

Automakers rely on parts suppliers to meet quality standards, provide new technology and make investments to fulfill supply contracts. But another bankruptcy is likely to be highly disruptive to the supply base, which is already reeling as automakers cut production and idle their factories to cope with falling sales.

A total of 231 first-tier parts suppliers representing 52 percent of automakers' annual purchases responded to the survey, which was conducted over three weeks in April. The survey ranked the automakers based on degree of trust, open and honest communication, amount of help given to suppliers to reduce costs, and supplier profit opportunities, the company said.

AOL turns to ex-Google exec for fresh start

Shortly before taking over as head of AOL in April, Tim Armstrong ripped out some office doors.

The doors — made of glass and requiring a company key card to pass through — stood in AOL's New York headquarters, separating the offices of executives like former CEO Randy Falco and his No. 2, Ron Grant, from the rank and file.

The doors' departure is emblematic of a shift under way at AOL. Armstrong, 38, was recently hired away from Google Inc. and asked to give the long-suffering Internet unit of Time Warner Inc. yet another shot at salvaging its future after what seems like a lost decade.
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If nothing else, Armstrong's arrival has thrilled employees who were unhappy under his predecessors, who were widely considered out of touch and out of place.

But Armstrong's more approachable style won't be enough to restore AOL's luster. AOL's legacy business, its dial-up Internet service, continues to dwindle while its newer online advertising service is not yet picking up all the slack. AOL's operations still make money, but that profit has been falling.

Armstrong's ability to find the right formula could be especially put to the test if Time Warner formally separates itself from AOL by spinning the Internet division off into a standalone business, as the company is exploring. That move would finally undo the $147 billion deal in which AOL bought Time Warner in 2001, which became one of the worst corporate combinations in history.

AOL would not make Armstrong available for comment. But current and former employees said his open management style, which he tried to show by taking out the doors, already has marked a stark change from Falco and Grant, who had snippy nicknames at AOL like "Rondy," a combination of their first names.

Falco and Grant joined AOL in late 2006 as part of a surprising management change by Time Warner that ousted AOL's then-CEO, Jonathan Miller. Falco had been president and chief operating officer at NBC Universal Television Group, while Grant came from Time Warner, where he was senior vice president of operations.

Falco was a terrific media executive but he didn't have Internet experience, and Grant was talented but had not managed large teams of people, said Ted Leonsis, an executive who retired from AOL in late 2006.

Yen Falls as Report Says N. Korea Launched Short-Range Missile

“This is not a pretty picture, especially with this kind of external issue and the North’s stern stance,” said Kim Yong Tae, who helps oversee the equivalent of $1.2 billion in assets as a fund manager in Seoul at Yurie Asset Management Inc. “Investor sentiment will be negatively impacted and it’s going to be difficult to expect big gains” in the short-term.

The won fell 0.1 percent to 1,248.82 per dollar at the close of trading in Seoul after earlier dropping as much as 1.7 percent. The MSCI Asia Pacific excluding Japan index of regional shares fell 0.2 percent.

Eight-Month Low

The yen slumped to an eight-month low against the dollar on Oct. 9, 2006, when the North Korea government said it had detonated its first nuclear bomb. A nuclear test is a threat to Japan, as Tokyo is 809 miles (1,295 kilometers) from North Korea’s capital of Pyongyang.

U.S. President Barack Obama said North Korea’s claim it conducted a nuclear test is of “grave concern,” according to an e-mailed statement from the White House. The test is in “blatant defiance“ of a United Nations Security Council resolution, Obama said.

Losses in the yen against the dollar may be tempered after credit-default swaps for Japan fell last week while those for the U.S. advanced, indicating an improving perception of the Asian nation’s credit quality relative to that of the world’s largest economy.

The cost to protect buyers of Japanese sovereign bonds for five years declined to 45.97 on May 22, the lowest since Jan. 28, according to CMA DataVision. The price for the U.S. climbed to 42.51, the highest since April 28, from 37.75 the previous day.

Credit-default swaps, contracts to protect against or speculate on default, pay the buyer face value if a borrower fails to adhere to its debt agreements.