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THE EVENING WRAP
February 25, 2005 -- 5:31 p.m. EST
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The U.S. economy grew in 2004 at the fastest pace since 1999, perhaps with enough momentum to heat up the early months of 2005. Will it fuel higher inflation, too?
Economy Bounces Back
By MARK GONGLOFF
THE WALL STREET JOURNAL ONLINE
With a burst of growth in the second half, the U.S. economy grew in 2004 at the fastest pace since 1999, perhaps with enough momentum to heat up the early months of 2005. Will it fuel higher inflation, too?
Gross domestic product, the broadest measure of economic growth, rose at a 3.8% annualized pace in the quarter, the Commerce Department said, compared with 4% in the third quarter. The government initially said GDP grew at a 3.1% rate in the fourth quarter, but some revised numbers on international trade and inventory build-up boosted it significantly. GDP grew 4.4% pace in 2004, the best performance since 1999's 4.5% growth.
The quarter's growth in business spending was revised upward to 14%, the best pace in more than a year. The pace of consumer spending was ratcheted down to 4.2%. Morgan Stanley economists David Greenlaw and Ted Wieseman attributed those revisions to a shift in the way truck sales were tallied in the quarter. The Commerce Department first attributed many truck sales to consumers that new registration data have indicated were sales to businesses. Though lower than first thought, the level of consumer spending, which makes up more than two-thirds of total GDP, was still fairly high. Some economists said the fourth-quarter momentum had carried into the first quarter of 2005; Messrs. Greenlaw and Wieseman, for example, boosted their forecast for the first-quarter rate of GDP growth to 4.1% from 3.3%.
But the Federal Reserve's favorite inflation gauge was unchanged at a 1.6% annualized rate, a level considered tame by most economists. How long will that last? Some economists believe that firms are reluctant to increase their labor costs, the biggest driver of inflation, as much as they have in previous economic expansions. Others believe that confident businesses will start adding bunches of more workers soon. If they're right, the Fed might soon be slamming on the economy's brakes. "Suddenly, the U.S. growth slowdown has vanished," Morgan Stanley economist Richard Berner wrote in a note. "Such above-trend growth will narrow margins of slack and boost inflation risks. If both continue, the Fed may begin to consider tightening beyond neutrality to outright restraint."
The Belle of the Bell Ball
MCI said it lost $32 million, or 10 cents a share, in the quarter, compared with a profit of $22.2 billion a year ago. That's not a misprint: MCI earned $22.2 billion a year ago, but mostly because of a big windfall related to its emergence from bankruptcy. Revenue fell 10% to $4.97 billion, thanks in part to its waning residential long-distance business. Still, sales beat Wall Street forecasts, as did the earnings results. But the company formerly known as WorldCom warned of slumping revenue in 2005, saying it expected $18 billion or $19 billion in sales, down from $20.7 billion in 2004 and short of Wall Street forecasts. MCI's shares fell nearly 2%.
The news came a day after Qwest made a revised $8 billion pitch to buy MCI. The offer was bigger than that of Verizon, which has offered just $6.75 billion, but Qwest's financial position is shakier. Qwest's new bid offers MCI shareholders some safeguards against its own share price falling, and though MCI has already agreed to take the Verizon offer, many MCI shareholders clamored for the board to reconsider. MCI said it would push to complete the Verizon merger, but that it would also give a fair review of Qwest's offer. In the earnings conference call, Leon Cooperman, chairman of Omega Advisors, a $3.5 billion hedge fund that owns about 3% of MCI, grumbled that MCI's selling price didn't match the strides it had taken since pulling out of the biggest corporate bankruptcy in U.S. history last year -- but he added that he was "disappointed" by Qwest's latest offer. And though the bidding war is probably not over, investors seemed to think Verizon has the upper hand. Shares of Qwest, which may need MCI more than Verizon does, fell more than 7%, while Verizon shares rose about 2%.
Home Sales Ease
In the day's other major economic report, the National Association of Realtors said sales of pre-owned homes fell slightly in January to an annual pace of 6.8 million units. Economists had expected the rate of sales to rise, but the NAR's data included condos and co-ops for the first time, rendering previous forecasts meaningless. The median price for a home sold in January was 10.5% higher than a year ago. Suffice it to say that, with mortgage rates still relatively low, the housing market is plugging along. "Without any major rise in mortgage rates, there is little reason to believe that home sales will fall apart anytime soon," Joel Naroff, president of Naroff Economic Advisors, said in a note. Those worried about a housing bubble could possibly take some comfort in the news that housing inventories fell in the month to just a 3.7-month supply, a record low. A more bubbly market might see supply rising, making prices vulnerable to a sudden dip in demand.
Arab Bank Charged in Money-Laundering Scandal
Another money-laundering scandal has engulfed another storied financial institution -- this time, one of the Middle East's biggest banks. The U.S. Comptroller of the Currency said it found violations of money-laundering laws at the U.S. branch of Palestinian-owned Arab Bank. Last month, Washington, D.C., bank Riggs pleaded guilty to a criminal charge of failing to report suspicious laundry-like activity. According to federal regulators, millions of dollars flowed through Arab Bank to groups and people who weren't customers and who allegedly posed a "high risk" of money-laundering. Arab Bank has been sued by the families of Israeli victims of terrorism for allegedly paying families of Palestinian suicide bombers. The bank has denied that it knowingly supported terrorism. But Arab Bank, which earlier this month announced it was closing its U.S. branch amid the regulators' investigation, agreed to stop transferring money or opening new accounts at the branch. The comptroller's office will also reassign some of its agents who failed to catch the money-laundering activity earlier.
Stocks Rise Again
Fairly strong economic data, along with a dip in crude-oil prices, helped lift U.S. stocks for a second straight day. The Dow gained nearly 93 points, with about 1.5 billion shares trading on the Big Board. The index erased Tuesday's brutal decline and ended the week higher. The S&P 500 rose about 11 points, and the Nasdaq rose about 14 points. Crude-oil futures fell to nearly $51 a barrel on the New York Mercantile Exchange. The U.S. dollar continued to recover against the Japanese yen and the euro, three days after posting its worst daily decline in about two months. Treasury bond prices edged higher, sending interest rates lower. Major European markets rose, as did most major Asian markets.
Static at Clear Channel
Clear Channel said it lost $4.67 billion in the fourth quarter, compared with a profit of $187.2 million a year ago. The loss was due entirely to a $4.88 billion charge to comply with federal regulations on accounting for assets. Excluding the charge, the operator of radio and TV stations earned $214.3 million, or 37 cents a share, up 14% from a year ago. Clear Channel's revenue rose 1% to $2.31 billion, disappointing analysts, some of whom also warned of hard times ahead for the radio industry. Just yesterday, media conglomerate Viacom said it was shedding some of its radio assets, while moving out of another key Clear Channel business, outdoor advertising. Unlike Viacom's billboard business, however, Clear Channel's outdoor advertising revenue was a plus in the quarter, rising 12%. But the company, facing growing competition from iPods, satellite radio and other commercial-free media, said it would try to convince advertisers to make shorter ads and pay higher rates, too. Investors were skeptical, and Clear Channel's shares fell some 3%.
Three Terrorist Suspects Captured in Iraq
Iraqi troops bagged three Iraqis suspected of assisting Abu Musab al-Zarqawi, the Jordanian terrorist leading al Qaeda's operations in Iraq. Iraqi officials said one of the men captured was a key lieutenant to Mr. Zarqawi. Iraq's interim national security adviser claimed the government was just "a few weeks" from capturing Mr. Zarqawi himself. Three U.S. soldiers died and nine more were wounded when their patrol hit an improvised explosive device in a town north of Baghdad. Grand Ayatollah Ali al-Sistani, Iraq's top Shiite cleric and one of the most influential men in the country, endorsed Ibrahim al-Jaafari to be Iraq's new prime minister. Mr. Jaafari is the candidate proposed by a conservative bloc of the Shiite coalition that won the most votes in last month's national parliamentary election. His nomination has caused a rift in the coalition, and some Iraqis have suggested they prefer a more secular-minded prime minister. The secular-minded Ayad Allawi, the current interim prime minister, has let it be known that he wouldn't mind the job.
Japanese Drug Makers to Merge
Sankyo, Japan's No. 2 drug maker, said it will buy Daiichi Pharmaceutical, Japan's No. 6 drug maker, for about $7.8 billion. After the deal, the combined company will have about $8.5 billion in sales, but will still be No. 2 in Japan behind Takeda Pharmaceutical. And both firms will still lag far, far behind the world's giants such as Pfizer and GlaxoSmithKline. Both, in fact, could still be merger targets for some of the world's bigger pharmaceutical companies, and other Japanese drug makers will also likely seek dance partners in a fight for survival.
EU Testing Microsoft Compliance
The European Commission said it was reviewing Microsoft's compliance with its orders to change its marketing practices. The EU had ordered the software maker to offer versions of its Windows operating system stripped of Windows Media Player, to share some of its code with other software makers and to pay a big fine. Some competitors have complained that Microsoft hasn't exactly toed the line; if the EU agrees, it could slap the software maker with big penalties.
Wal-Mart Workers Vote Against Union
Workers at a Wal-Mart Tire & Lube Express in Loveland, Colo., voted 17-1 against joining the United Food and Commercial Workers, passing up a chance to be the first unionized Wal-Mart employees in the U.S. The UFCW vowed to have the results thrown out, since no union members were allowed to observe the voting. The union also claimed that Wal-Mart added employees to the unit to weaken union support. Wal-Mart, the world's biggest retailer, has no contract with a union at any of its stores. Workers at a store in Quebec have unionized, but couldn't agree to terms of a contract with Wal-Mart, and the retailer said it would shut the store down because the workers' demands made the store impossible to operate profitably any more. In 2000, 11 workers in the meatpacking department of a Texas Wal-Mart agreed to join UFCW, but Wal-Mart eliminated meatpacking positions from all of its stores shortly thereafter. Wal-Mart has allowed unions into its stores in China, but Chinese labor unions have little or no bargaining power.
Road-Kill Candy Squashed
Taking the universe of animal-shaped snack food in a bold new direction, Kraft Foods last year introduced Trolli Road Kill Gummi Candy, fruit-flavored treats shaped like tire-squished squirrels, chickens and other unfortunate fauna. Some people haven't appreciated Kraft's efforts, though; the New Jersey Society for the Prevention of Cruelty to Animals said the candy may make young drivers feel cavalier about crunching critters. "It sends the wrong message to children, that it's OK to harm animals," a spokesman told the Associated Press. Kraft, a unit of cigarette maker Altria, protested that it meant no offense, but it also decided today to discontinue the candy. "In hindsight, we understand how this product could be misinterpreted," Kraft said in a statement. It said the candy might still be found on store shelves until inventories are depleted.
http://online.wsj.com/articles/the_evening_wrap__________________________________
TODAY'S MARKETS
The Dow industrials finished up 92.81 points at 10841.68, its highest close for the year. The average gained 56.4 points this week despite Tuesday's 174-point selloff. Exxon has surged 24% in 2005, including a 3.5% gain Friday.
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http://online.wsj.com/article/0,,SB1109303...tml?mod=djemTEWKyrgyzstan votes in legislative elections Sunday, possibly presenting the next Russia rebuff from a former Soviet region.
http://online.wsj.com/article/0,,SB1109292...tml?mod=djemTEWThe story behind how the U.S. food industry became addicted to salt -- despite 20 years of government warnings -- is one of imperfect food science, stubborn consumer tastes and deft political lobbying.
http://online.wsj.com/article/0,,SB1109289...tml?mod=djemTEWReaching the age of 110 is quite a feat, but few folks who claim to be supercentenarians can prove it. That's where the nonprofit Gerontology Research Group comes in.
http://online.wsj.com/article/0,,SB1109299...tml?mod=djemTEW