7 ways private equity is gaming your pension

It's really difficult to trust and find a good person to give your hard earn money and invest. This is one of the articles I came across of one such news. There are both sides, good and bad. It's always to be informed than without knowing anything. Kentucky high school history teacher Randy Wieck is on a lonely mission to discover the whereabouts of the 12 percent of each paycheck he and 74,800 other educators are putting into a state pension fund. He’s especially keen to unearth details on the $1.1 billion the badly underfunded Kentucky Teachers’ Retirement System has committed to private equity and hedge funds. The quest pits Wieck against billionaire fund managers, a white-shoe law firm, state pension officials, and even his own union. “It’s my money and taxpayer dollars they’re skimming,” he says. “And they refuse to say how much they’re charging.” Wieck filed an open-records request last fall seeking access to details of the terms under which his pension plan had invested in alternative assets. Frustrated by the resistance he faced, he drafted his own legal complaint and sued the plan in Jefferson County Circuit Court in November. The suit was dismissed on jurisdictional grounds in March. Wieck is considering whether to refile in Franklin County, where the judge said the suit belongs. The teacher’s contention that alternative-asset managers may be tacking on hidden charges and otherwise harming investors is supported by research from the U.S. Securities and Exchange Commission. More than half of alternative-asset managers surveyed by the SEC were found to be adding “hidden fees” on top of those disclosed to clients, Bloomberg reported last April. Given the broad concerns the SEC raised, Blackstone Group and TPG Capital have begun detailing in marketing materials tens of millions of dollars they charge portfolio companies for services such as health-care consulting and bulk purchasing. Private equity firms pool money from investors to buy companies with the goal of restructuring and reselling them at a profit. Pension funds have invested more than $3 trillion in private equity and other alternative assets. It’s expensive: Pension funds and other investors typically pay private equity firms 2 percent in annual fees, plus 20 percent of profits on any investments. Private equity officials say that to run their businesses, they have to keep virtually everything about their operations secret, including their fees. They often require the public pensions investing in their funds to sign confidentiality agreements and join them in resisting Freedom of Information Act requests, open-records requests, and legal actions by pension participants, taxpayers, or anyone else seeking details about the agreements. Dory Wiley, chief executive officer of Commerce Street Holdings, defends the need for secrecy. His funds have what he calls a unique strategy for buying distressed bonds that he doesn’t want others to imitate. “You can’t copyright an idea,” he says. “And there are a lot of firms on Wall Street that copy what others are doing.” Wieck—a Louisville native with a Ph.D. in American studies from the Sorbonne—believes he and his colleagues have reason to worry. Theirs is one of the worst-funded teachers’ plans in the nation, at $18.7 billion in assets, with just 54¢ on hand to pay each dollar of promised benefits. After Wieck sued, Carlyle Group and Blackstone separately hired Joseph McLaughlin of Simpson Thacher & Bartlett, who drafted almost identical letters arguing that releasing the documents “would cause substantial competitive harm.” Sharing an edited version was also impractical because “confidential trade secret information pervades the requested documents.” McLaughlin declined to comment. On examination, such documents show that the industry often labels as "trade secrets" information that has as much to do with high fees, weak oversight, and conflicts of interest as it does with business strategies. Bloomberg obtained roughly 50 private equity fund documents similar to those Wieck is seeking. The excerpts below from Blackstone Group, Camelot Group, Commerce Street Capital, HKW, and Starwood Capital reveal how private equity firms shore up their power—often at the expense of pension funds and the people who depend on them. All the companies declined comment, except Commerce Street. 1. Fund managers decide how much their assets are worth Legalese: “Asset valuations will be determined by managers. The fund does not intend to commission periodic appraisals of the investments and will not be obligated to provide fair market value estimates.” What that means: Private equity managers often have large holdings in illiquid assets such as troubled companies and real estate, which are, in fact, difficult to value. That said, it's in the managers' best interests to assign generous values because the managers typically get to keep 20 percent of profits and rely on historical returns to pitch new funds to investors. 2. Managers decide what to pay themselves Legalese: “Managers expect that affiliate services will be provided at competitive rates but the compensation may not be determined through arm's-length negotiation.” What that means: Private equity funds often buy troubled companies and try to restructure them. In the process, they hire affiliates in which the private equity partners may have financial interests to provide administrative and other services. The SEC has found that such related-party dealings often come at a steep cost that cuts into the returns paid to pensions and other fund investors. 3. The chief compliance officer freelances at your expense Legalese: "A law firm wholly owned by HKW's partner, General Counsel and Chief Compliance Officer, also has an arrangement with five of the HKW funds to act as counsel when such HKW Funds purchase or sell portfolio companies. ... There may be a conflict between her economic interest and what is in the best interests of those HKW funds." What that means: The chief compliance officer is responsible for making sure that a private equity firm acts in accordance with applicable laws and fund terms. The language above, though, notes that she may also act as counsel to related funds at the same time. That opens the door to conflicts of interest, which should be a red flag for investors. 4. Yes we self-deal. But you must still trust us Legalese: “Fund managers can invest in companies in which they have a preexisting interest. They may invest in other funds which may compete with the fund for investments, management's time and in other ways. ... It may be difficult for investors to subject the behavior of fund managers to close scrutiny. Investors will ultimately be heavily dependent upon the good faith of the fund managers.” What that means: Private equity managers often run several funds and may use them to buy and sell assets in which they already have a stake. Investors often have no way of knowing what's going on. They just have to trust that the fund managers are doing the right things. 5. It’s industry practice for some investors to profit at the expense of others Legalese: “In accordance with common industry practice, managers may enter into ‘side letters’ that grant certain investors rights, benefits and privileges not made available to other investors. Such agreements will be disclosed only to investors who have negotiated rights to review such agreements.” What that means: Big investors in private equity funds often receive especially favorable terms such as fee cuts and first looks at especially attractive investments. Such arrangements, which are outlined in "side letters," are often kept secret from the other investors, who may be at a disadvantage as a result. 6. Rules? Not for us Legalese: "The fund is not subject to the Investment Company Act, which, among other things, requires investment companies to have independent directors and to maintain their assets and securities in the custody of a qualified custodian … " What that means: Mutual funds are strictly regulated under federal securities law. Private equity and hedge funds are not. 7. Public officials must fight for our secrecy Legalese: "If a public records access law requires a limited partner to disclose information … the limited partner must take all reasonable steps requested by Blackstone to oppose and prevent disclosure.” What that means: Private equity firms argue that virtually everything about their activities is a "trade secret," and pensions and other investors in their funds agree in advance to keep it that way.

Wall Street jumps as Spain moves toward reforms

NEW YORK (Reuters) - The S&P 500 snapped a five-day string of declines in a broad-based rally on Thursday, as Spain's plans for economic reform eased some worries about one of the euro zone's most troubled countries.

The benchmark S&P 500 rose 1 percent, its biggest percentage gain since the Federal Reserve announced its plan for a third round of stimulus on September 13.

Spain announced a detailed timetable for economic reforms for the fiscally troubled nation and a tough 2013 budget based mostly on spending cuts.

"Any information that gives some understanding about what's going to happen is good for the market. It's small news, but more certainty is good," said Giri Cherukuri, head trader at OakBrook Investments LLC in Lisle, Illinois.

The EU's Economic and Monetary Affairs Commissioner, Olli Rehn, said Spain's detailed timetable for economic reforms goes beyond what the European Commission has asked of Spain. Rehn said it is an ambitious step forward.

Gold stocks ranked among the day's bigger gainers in the wake of Spain's news; the PHLX gold/silver index (^XAU) jumped 3 percent.

Adding to the rally was a last-minute push by investors to reposition portfolios ahead of the quarter's end, with the S&P 500 on track for a gain of 6.2 percent in the third quarter. Friday will be the quarter's last trading day.

"What we've seen is broadly a consolidation, but also an attempt by fund managers to position properly for the rest of the year, to be in the best sectors," said Bruce Zaro, chief technical strategist at Delta Global Asset Management in Boston.

The Dow Jones industrial average (^DJI) shot up 72.46 points, or 0.54 percent, to 13,485.97 at the close. The Standard & Poor's 500 Index (^GSPC) rose 13.83 points, or 0.96 percent, to finish at 1,447.15. The Nasdaq Composite Index (^IXIC) gained 42.90 points, or 1.39 percent, to close at 3,136.60.

While the Nasdaq led Thursday's gains, it also led the market's declines earlier this week - its volatility possibly reflecting investors' nervousness about the U.S. economic outlook, analysts said.

Apple (AAPL), up 2.4 percent at $681.32, gave the biggest lift to the Nasdaq. The semiconductor index (.SOX) gained 2.3 percent, bolstering the Nasdaq 100 (.NDX). Intel Corp (INTC.O) was up 1.9 percent at $23.09.

After the bell, U.S.-listed shares of Research In Motion (RIMM) surged 15 percent to $8.21 after the Canadian maker of the BlackBerry reported a smaller-than-expected quarterly loss.

On the deal-making front, Tempur-Pedic International Inc (TPX) agreed to buy rival mattress maker Sealy Corp (ZZ) for about $242 million and assume about $750 million in debt. Tempur-Pedic shares jumped 14.4 percent to $30.64, while Sealy's stock rose 2.3 percent to $2.19.

In the earnings realm, Discover Financial Services (DFS.N) reported third-quarter earnings that beat expectations - and its shares climbed 7.3 percent to $39.71.

Stocks were rising before Spain's announcement on hopes that China would take steps to spur its slowing economy.

China has severely underestimated this year's global economic slowdown, and further cuts to Chinese interest rates or bank reserve requirements will hinge on any new deterioration in the external environment, a central bank adviser said on Thursday.

U.S. economic data was mixed. A report showed initial jobless claims dropped by 23,000 to 359,000, sharply exceeding the decline of 4,000 that had been expected.

But the final read on second-quarter gross domestic product showed growth of just 1.3 percent, weaker than an expected 1.7 percent. And August durable goods orders tumbled 13.2 percent, much more than the expected drop of 5 percent.

Volume was below average at roughly 5.74 billion shares traded on the New York Stock Exchange, the Nasdaq and the Amex, compared with the year-to-date average daily closing volume of 6.53 billion.

Advancers outnumbered decliners on the NYSE by a ratio of slightly more than 3 to 1,and on the Nasdaq, about three stocks rose for every one that fell.

Obama tries to reassure public on economy, jobs

Obama says jobs, economy remain priority despite week's focus on bin Laden

WASHINGTON (AP) -- President Barack Obama is reassuring the public that jobs and the economy are his top priority.

At the end of a historic and emotionally charged week that began with his nationally televised announcement that Osama bin Laden had been killed in Pakistan during a raid by U.S. special forces, Obama on Saturday returned to promoting his energy agenda.

U.S. forces raided a compound in Abbottabad, Pakistan, where bin Laden had lived for several years, killing the al-Qaida leader.

The news of bin Laden's demise dominated the week's headlines.

"So although our economy hasn't been the focus of the news this week, not a day goes by that I'm not focused on your jobs, your hopes and your dreams," Obama said in his weekly radio and Internet address.

He recorded the address Friday while visiting an Indianapolis transmissions plant that makes systems for hybrid vehicles.

Obama has been traveling around the country to talk up his plan to reduce U.S. consumption of foreign oil -- and the price Americans pay for it -- by increasing domestic oil production, encouraging a shift to alternative energy sources and building vehicles that use less fuel.

He says shifting to jobs like those at the Indianapolis factory will create more jobs and help the economy grow.

"The clean energy jobs at this plant are the jobs of the future, jobs that pay well right here in America," Obama said. "It's clean energy companies like this one that will keep our economy growing, create new jobs and make sure America remains the most prosperous nation in the world."

Republicans devoted their weekly message to bin Laden.

Massachusetts Sen. Scott Brown praised years of diligent work by the military and by intelligence professionals to pinpoint bin Laden's location. The al-Qaida leader's death, Brown said, sends a clear message to others like bin Laden.

"The example will not be lost on other terrorists," Brown said. "Any escape they make will be temporary. Any sanctuary they find will be uncovered. Those who harm or threaten the American people will be dealt with, on our terms, however long it takes."

SEC weighs new rules for private companies' stock

Market regulators consider easing rules for private companies that issue stock

DALLAS (AP) -- The Securities and Exchange Commission is considering whether to ease rules on private companies that issue shares.

Chairman Mary Schapiro said in a speech Friday that she has asked the SEC staff to review the rules. The changes might make it easier for companies such as Facebook and Twitter to raise money by issuing stock, without facing costly reporting requirements imposed on public companies.

Private companies can keep their finances secret if they have fewer than 500 shareholders. If they have more, they must provide details on their companies and finances.

The new rules might replace the process by which technology companies and other startups offer shares publicly through initial public offerings. Companies that have IPOs must disclose financial details about themselves.

Earlier this week, Schapiro sent a letter to Rep. Darrell Issa, R-Calif., notifying him of the review. Issa, who is chairman of the House Oversight and Government Reform Committee, had previously raised concerns with Schapiro that the current rules discourage investment and limit economic growth

The current rules are designed to stop insiders from trading shares using information that is not available publicly. In her letter to Issa, Schapiro said the agency must walk a fine line, protecting investors from insider trading while making it easier for private companies to raise money.

Companies "should not be overburdened by unnecessary or superfluous regulations," Schapiro said in the letter. "At the same time, all offerings must, of course, provide the necessary information and protections to give investors the confidence they need to invest in our markets," she said.

The staff review aims to develop ideas to reduce companies' cost of compliance without sacrificing investor protection, she said.

In addition to Facebook and Twitter, the rules would affect the daily discount site Groupon and Zynga, the maker the online game "FarmVille."

Many of these companies are startups in name only. They have thousands of employees and estimated billions of dollars in yearly revenue. But they have put off going public. That's partly because they already have access to capital from deep-pocketed investors and venture capitalists.

Going public also requires a time commitment from top executives. Facebook's 26-year-old CEO, Mark Zuckerberg, seems to prefer keeping his focus on the company's product development, rather than cashing out through an IPO or answering analysts' questions about earnings and revenue in quarterly conference calls.

Facebook has been trying to put off reaching the 500-shareholder threshold. For example, it has barred current employees from selling their shares. Nonetheless, it has indicated that it is likely to file its IPO plans by the end of April 2012.

Before the companies' IPOs, shares of privately held companies can be traded on private stock exchanges, such as SecondMarket, based in New York, and SharesPost, based in San Bruno, Calif. The shares are generally sold by former employees or early investors in these companies, and often there are more buyers than sellers. Only institutional investors or high net-worth individuals -- those worth more than $1 million -- can buy the shares.

Wagner reported from Washington. AP Technology Writer Barbara Ortutay in New York contributed to this report.

Stocks waver as government shutdown looms

Stocks waver as oil jumps above $112; government shutdown hangs over the market

NEW YORK (AP) -- A surge in oil and the threat of a government shutdown weighed on stocks Friday.

Investors kept one eye on Washington, where Republicans and Democrats were in the final day of talks to reach a budget agreement. Without a deal, the federal government is expected to stop all services that aren't considered essential. That means most economic reports would be suspended. Sales of debt would continue.

Benchmark crude oil jumped $2.49 to settle at $112.79 per barrel on the New York Mercantile Exchange. That's the highest price since Sept. 22, 2008.

Over the past two months, most stocks have fallen following large jumps in oil prices as investors worried that higher transportation costs would cut into company margins and consumer spending.

The Dow Jones industrial average lost 29.44 points, or 0.2 percent, to close at 12,380.05. The Standard & Poor's 500 index slipped 5.34, or 0.4 percent, to 1,328.17. The Nasdaq composite lost 15.72, or 0.6 percent, to 2,780.42.

The Dow ended the week flat, while the S&P and Nasdaq lost 0.3 percent. All three indexes made gains in the previous two weeks.

Transportation companies fell. Delta Air Lines Inc. dropped 3.9 percent, and United Parcel Service Inc. lost 1 percent. Energy companies rose, leading the 10 industry groups within the S&P 500. Occidental Petroleum Corp. rose 2.6 percent, and Anadarko Petroleum Corp. rose 1.6 percent.

Todd Salamone, director of research at Schaeffer's Investment Research, said most stocks tend to rise along with oil prices over the long term. "The recent breakdown in the pattern has largely been due to fears of supply shocks," he said. "But the oil rally could also be attributed to a stronger world economy."

World markets rose broadly. The Euro Stoxx 50, an index of European blue chips, gained 0.7 percent. Japan's benchmark Nikkei index rose 1.9 percent.

Expedia Inc. rose 13 percent, the most in the S&P 500 index, after it said it would split off its TripAdvisor.com division.

More than two stocks fell for every one that rose on the New York Stock Exchange. Trading volume was 3.7 billion shares.

Government lets Google buy travel software company

Approval of travel software deal underscores broader antitrust concerns about Google

WASHINGTON (AP) -- Google Inc. won government clearance with restrictions Friday for its $700 million purchase of airline fare tracker ITA Software in a deal that will give the Internet search giant a key role in online travel.

Google promises to give consumers more choices and better ways to search for plane tickets as it incorporates ITA technology, which powers the reservation systems of most major U.S. airlines and many popular online fare-comparison services, including Kayak, TripAdvisor and Hotwire.

The company had to accept significant conditions, though, in a sign that federal antitrust officials are becoming more concerned about whether Google's enormous clout as a major gateway to the Internet has the potential to stifle competition broadly online.

As Google expands far beyond its core search business into specialized markets such as travel, companies operating in all corners of the Web -- and government regulators as far away as Europe -- are taking notice.

Rivals and regulators alike are worried that Google could use its control over the Internet's dominant search engine to extend its monopoly into travel and other markets by steering users to its own sites and services and burying links to rivals far down in its search results. Indeed, Google's search results already highlight some of its own specialized services, including mapping, video and finance.

Although Justice Department officials did not tackle that danger outright Friday, they laid the groundwork for a potential government investigation into manipulation of Internet search results. Google agreed to ongoing federal monitoring of its behavior to win government approval.

"They clearly decided that they want to keep an eye on Google," said Thomas Barnett, an attorney who represents Expedia Inc., which opposed the ITA deal in a coalition with other online travel services including Microsoft Corp.'s Bing, Travelocity, Kayak Software Corp. and Farelogix Inc. Expedia owns TripAdvisor and Hotwire services.

"The ability to use search dominance to exclude competitors is not unique to travel," added Barnett, who was head of the Justice Department's antitrust division when it threatened a lawsuit to block Google from entering into a search partnership with Yahoo Inc. in 2008.

The agreement with the Justice Department comes at a time of mounting government scrutiny of Google's behavior in Washington and beyond.

The European Commission and the Texas attorney general are looking into whether Google manipulates search results to extend its monopoly into other online businesses. The European investigation started after competitors -- U.K.-based price comparison site Foundem, French legal search engine ejustice.fr and Microsoft-owned shopping site Ciao -- complained that their services were being buried in Google searches. The Senate Judiciary Committee's antitrust subcommittee also is investigating whether Google gives its services favorable treatment in search results.

In addition, a federal judge last month rejected a proposed legal settlement that would have given Google the digital rights to millions of out-of-print books after determining that the agreement would have violated U.S. copyright laws and given Google's already-dominant search engine an unfair advantage over its rivals.

And just last week, the Federal Trade Commission announced a landmark agreement with Google to settle charges that it deceived users and violated its own privacy policy when it launched a social networking service called Buzz last year. The settlement requires Google to adopt a comprehensive privacy program and submit to independent audits of that program every other year for the next 20 years.

Eric Goldman, academic director of the High Tech Law Institute at the Santa Clara University School of Law in Silicon Valley, said the agreements with Justice and the FTC "collectively indicate that the U.S. government has more and more hooks into Google and is subjecting Google to greater oversight and reduced operational freedom."

Nonetheless, Friday's approval by the Justice Department makes ITA the latest major deal that Google has managed to clear with Washington. Other big purchases include the 2007 acquisition of Internet advertising network DoubleClick and last year's purchase of mobile ad service AdMob, both of which were approved by the FTC without any conditions.

Google has said it wants to use ITA to improve its search results for travel and doesn't plan to sell airline tickets or book other travel arrangements on its own site. Rather, ITA would enable the company to command higher ad rates from airlines, hotels, rental car agencies and other leisure services trying to reach travelers.

Google offered a hint about what could be coming in a blog post Friday. It suggested that by simply typing in "flights to somewhere sunny for under $500 in May" into Google, a user would get not just a set of links but also flight times, fares and a link to sites for buying the trip.

To win Justice Department clearance, Google agreed to license ITA's software to other companies on fair terms through 2016. And it would continue to invest in research and development of new products, which it would also have to license. Google had previously promised only to honor all of ITA's current contracts, which expire over the next few years, leaving ITA customers to worry that Google would keep its innovations for itself. Under the terms of the approval, any disputes would be subject to binding arbitration.

Google also agreed to establish a separation between ITA and other Google operations to ensure that it cannot misuse proprietary customer data or technology that resides on or runs through ITA servers.

But most significant, the government will monitor Google to ensure it does not engage in anticompetitive behavior, which could include manipulation of search results. The company will be subject to broad requirements to report to government officials on its online travel operations, including travel search and advertising. In addition, the government will establish a forum for complaints about Google's behavior. This could eventually pave the way for a broader investigation of Google by either Justice or the FTC.

The coalition of online travel services that had expressed concerns about the ITA acquisition praised the government conditions, calling them a "significant step in the right direction." Still, the group added in a statement that although "consumers won this round, but we must remain vigilant" to ensure that Google does not abuse its search monopoly.

Google says it understands that it will face more government scrutiny as it grows bigger. But the company argues that most of the accusations of anticompetitive behavior come not from users, who like its services, but from competitors that are not pleased with their search rankings. And that, the company, is not necessarily an antitrust problem.

"We built Google for users, not websites," the company said in a statement.

AP Airlines Writer Samantha Bomkamp in New York and Technology Writer Jordan Robertson in San Francisco contributed to this story.

Atomic Alchemy

Japan nano-tech team creates palladium-like alloy: report

TOKYO, December 30, 2010 (AFP) - Japanese researchers have created an alloy with properties similar to palladium, a precious metal used in many high-tech goods, a news report said Thursday, dubbing the breakthrough "present-day alchemy".

Kyoto University professor Hiroshi Kitagawa and his team said they used nano-technology to combine rhodium and silver, elements which do not usually mix, to produce the new composite, the Yomiuri daily said.

The alloy has similar properties to palladium, which is used in cars' emission-reducing catalytic converters as well as in computers, mobile phones, flatscreen TVs and dentistry instruments.

Like other white metals, such as silver and platinum, palladium is expensive, with its deposits largely limited to South Africa and Russia.

Palladium also has applications in the production of fuel cells -- a clean and renewable energy source that produces electricity by combining hydrogen and oxygen, with water as the only byproduct.

To make the new alloy, the Kyoto team used nano-technology to "nebulise" the rhodium and silver and gradually mixed them with heated alcohol, with the two metals mixed stably at the atomic level, the report said.

Japan's industry ministry has listed 31 rare metals, including palladium and lithium, which are used in industrial products, such as electronic devices and batteries. Of these, 17 elements are called rare earth minerals.

Resource-poor Japan has tried to shift from its dependence on China, which controls the bulk of global rare earth production.

Kitagawa said he hopes to create more alloys using nano-technology, without specifying which ones, the Yomiuri said.

Obama's High-Speed-Rail Projects in California and Florida

Giving more blood to economy through increase of fiscal expenditure, making basement for a newly emerging fast moving economy

Obama's High-Speed-Rail Projects in California and Florida

The master builder Robert Moses had a legendary strategy for ambitious public-works projects: start now, and figure out how to finish later. "Once you sink that first stake," he liked to say, "they'll never make you pull it up." And that, in essence, is the Obama Administration's strategy for spreading high-speed passenger rail across the United States.

It's an understandable strategy, since a true national network of bullet trains could cost as much as $1 trillion, and Obama has secured only $10.5 billion to start. But it's also a risky strategy, because the Administration is preparing to sink stakes in projects that might make perfect sense as links in that larger chain but look silly on their own. The first bullet train, an Orlando-Tampa line, has the feel of a glorified Disney shuttle. The boldest project, a Los Angeles–San Francisco line, was initially designed to begin with a train from nowhere to nowhere. Ohio got $400 million to launch a "high-speed" passenger service - with an average speeds of only 39 m.p.h. (63 km/h). (Can high-speed rail help make America green?)

Yes, you've got to start somewhere. Yes, the first stretch of the first interstate highway probably looked like a road to nowhere, and the transcontinental railroad must have seemed like a pipe dream until its two ends linked up in Utah. And yes, high-speed rail has the potential to reduce carbon emissions, highway deaths and hassle while improving productivity, promoting smarter growth and launching a new domestic manufacturing industry.

Nevertheless, the optics are awful, and Republican politicians are exploiting them. The plodding Ohio line is already dead, thanks to Republican Governor-elect John Kasich; so is an $810 million Milwaukee-Madison train, killed by Wisconsin GOP Governor-elect Scott Walker. Now the Obama Administration has shifted most of the Ohio and Wisconsin money to California and Florida, doubling down on its biggest investments, hoping to build short-term momentum toward its long-term vision of a new way to move around the country.

Those four states help illustrate its Moses strategy, its high-stakes game of high-speed chicken. It's an awkward approach in an era of intense partisanship and brutal budget crises, and it's off to a rough start. But that doesn't mean it's doomed to failure. After all, neither Ohio nor Wisconsin had sunk any stakes before canceling their fledgling projects. (See the top 10 American political prodigies.)

OHIO: "High-speed rail" conjures up images of sleek bullet trains that whip around Europe and Asia at over 200 m.p.h. (320 km/h), but so far Obama is pushing bullet trains only in California and Florida. Much of his program is actually "higher-speed rail": gradual upgrades to Amtrak lines that share track with freight railroads and can never exceed 110 m.p.h. (180 km/h). This is not crazy. When the goal is to provide alternatives to long drives and short flights, top speeds matter less than overall trip times, and relatively modest investments can generate real improvements that attract new riders - which in turn can generate momentum for additional investments, and so on. Slicing an hour off Chicago–St. Louis makes sense. Improving Charlotte-Raleigh in North Carolina makes sense.

The proposed "3-C" route that would have linked the Ohio cities of Cincinnati, Columbus and Cleveland at top speeds of 79 m.p.h. (127 km/h) - and average speeds of half that - did not make sense. Even as a first step towards 110 m.p.h., it seemed a pitiful alternative to driving on Rust Belt highways that aren't particularly congested. If anything, it was likely to destroy momentum for investments in high-speed rail during a time of limited resources. Republican Congressman John Mica, the incoming chairman of the House Committee on Transportation and Infrastructure, says "dogs" like the Ohio train could imperil the entire program. "Believe me, they can really affect its future," Mica says. He'll take over the program's purse strings in January, so he's not talking about a theoretical future. (See photos of China's high-speed-rail system.)

CALIFORNIA: Before Kasich and Walker scuttled their trains, construction on the Los Angeles–San Francisco line was supposed to start with a 65-mile (105 km) stretch from Corcoran, a tiny town south of Fresno, to Borden, an even tinier town north of Fresno. Obviously, the goal of this train from nowhere to nowhere was to pave the way for a train from somewhere to somewhere, but the optics would have been even worse than Ohio's. California fortunately got more than half of the $1.2 billion diverted from Ohio and Wisconsin, which will help it expand its first link to cover 120 miles (190 km) between Fresno and Bakersfield, the Central Valley's two largest cities.

That said, no one in their right mind would spend billions of dollars to build a Fresno-Bakersfield line in isolation either. It could only make sense as a jump-start for a line connecting L.A. to San Francisco in less than half the driving time; laying track around the densely populated endpoints would have been much more expensive, controversial and time-consuming than in the primarily agricultural Central Valley. And starting in the middle is a faster way to sink some stakes by 2012, create some jobs - high-speed rail was part of Obama's stimulus package, even though it didn't provide much stimulus - and build support for funding the rest of the $43 billion line so the completed patch wouldn't look like a preposterous boondoggle.

See more about the high-speed-rail plan in the U.S. following the stimulus package.

But there are serious questions about the rest of the line: the route, the ridership projections, how much it will cost, who will pay for it and whether it will get the political support it needs to survive. California is already facing a $28 billion budget gap, and even rail-friendly legislators are afraid that massive high-speed cost overruns could lead to vicious cuts in social services and existing transportation projects. The California High-Speed Rail Authority has clearly adopted a Moses strategy, which is why opponents want to kill the project before construction can begin. "Once this gets started, there's an unspoken mandate to finish the entire system," says a high-speed-rail cheerleader. "That's what the other side is afraid of."

FLORIDA: The L.A.-S.F. route, for all its problems, would be genuine high-speed rail. America's first planned bullet route, an 84-mile (135 km) hop from Tampa to Orlando featuring five stops and a top speed of 168 m.p.h. (270 km/h), is really too short and too slow to earn that distinction. It was fast-tracked because it's the nation's most shovel-ready project - it has all the needed permits plus the land on the Interstate 4 median - and it's Obama's only hope for a bullet train that could be ready to ride during his second term. But it's hard to justify as anything but the first link of Tampa-Orlando-Miami. Mica represents Orlando, but even he is skeptical of the Tampa end of the line; he suspects that most of the riders will be tourists shuttling a few miles between Disney World and the Orlando airport. And Florida Governor-elect Rick Scott, also a Republican, has suggested that he's willing to kill the train if his state has to help pay for it. (See the top 10 green stories of 2010.)

Thanks to Ohio and Wisconsin, Tampa-Orlando just got another big chunk of money, so Scott probably won't have to make good on that threat. The feds have now covered almost 90% of the estimated $2.7 billion cost, and the contractor selected to build and operate the line - at least seven major firms are planning bids - will be likely to cover the difference, partly because a subsequent Orlando-Miami segment is seen as a potential cash cow, and partly for the publicity sure to surround the first bullet train. "If the endgame was Tampa-Orlando, I can't say it makes sense," concedes Orlando Mayor Buddy Dyer. "But as a first piece of a national system, it makes a lot of sense."

China plans to spend $300 billion building a national high-speed-rail system by 2020; Spain hopes to complete a $200 billion network that same year. It's not possible to build a national system in the U.S., or even a complete regional corridor, with $10.5 billion. So the Obama Administration spread its initial grants around 31 states, hoping to build political momentum for the program around the country. Maybe states will like what they get and decide they want more. Maybe states will see Florida's spiffy bullet train zipping past traffic stalled on I-4 and decide they want something like it - even if it's not zipping as fast as it ought to be. (See a brief history of high-speed rail.)

WISCONSIN: Then again, maybe they won't. Chicago-Milwaukee has been a big success, Amtrak's fastest-growing line outside the Northeast Corridor. Milwaukee-Madison was expected to be equally popular and a crucial step toward a Chicago-Minneapolis line that could transform the region. But Walker ran against the new train as the local embodiment of Big Government, and he won easily. No, stakes hadn't been sunk, but the feds had committed $810 million; Moses always expected politicians to cash checks like that. Walker didn't, even though the costs to the state would have been minimal.

Big Government is always a convenient political opponent, especially when times are tough and families are cutting back, and the Administration was clearly overconfident that high-speed rail would inevitably expand once stakes were sunk. Still, it's one thing to complain about federal spending and quite another thing to divert it elsewhere. Shortly after Wisconsin's money was redistributed, the Spanish firm Talgo announced plans to shut down its U.S. train-manufacturing operations in Milwaukee and relocate the jobs to a state that continues to pursue high-speed rail. "I can't wait to see the ads in Wisconsin in 2014," an Obama aide says. "You'll have some guy working on the train in Florida: 'Thanks for my job, Governor Walker!' " (See photos of the world's longest railroad tunnel.)

The aide didn't say whether he expected to see high-speed-rail ads in 2012. By then, the first stakes will be sunk in Florida, and opponents will be mocking the Tampa-Orlando project as a ridiculous relic of a free-spending era, while supporters will be hailing it as an inspiring throwback to the days when America dreamed big and built big. It will be a proxy for a larger argument about the role of American government, and the outcome may well determine whether Obama gets to ride the train as President - and, perhaps, whether the train ever really leaves the station.

Russian tycoon Khodorkovsky gets 6 more years

Russian tycoon Khodorkovsky gets 6 more years

MOSCOW – Jailed oil tycoon Mikhail Khodorkovsky was sentenced to six more years in prison Thursday following a trial seen as payback for his defiance of Vladimir Putin and as a test of the rule of law in Russia.

The ruling drew immediate condemnation from the U.S. and European governments, who called it evidence of the use of Russia's judicial system for political ends.

Khodorkovsky's mother cursed the judge when the sentence was read, and said it was clear that he had come under strong pressure and could not have written the "nonsense that he read today."

Defense lawyers argued that Putin was behind the sentence, which matched what prosecutors had demanded for Khodorkovsky when they accused him of stealing oil from his own company and laundering the proceeds.

"You cannot count on the courts to protect you from government officials in Russia," Khodorkovsky said in a statement read outside the courthouse by his lead attorney.

Putin, now prime minister, has been seen as the driving force behind the unrelenting legal attack on Khodorkovsky, who challenged him early in his presidency. As he considers a return to the presidency in 2012, Putin appears unwilling to risk the possibility that a freed Khodorkovsky could help lead his political foes.

The outcome of the second trial exposes how little has changed under President Dmitry Medvedev despite his promises to strengthen the rule of law and make courts an independent branch of government.

"It's a very cruel and absurd sentence that proves the well-known fact that Russia has no independent courts," said Lyudmila Alexeyeva, a veteran rights activist and chairwoman of the Moscow Helsinki Group. "An independent court would have acquitted the defendants and punished the investigators who concocted the charges."

Judge Viktor Danilkin sentenced Khodorkovsky to 14 years, but said the new term will be counted from his 2003 arrest and run concurrently with his first term of eight years.

Following a 20-month trial, the judge convicted Khodorkovsky and his business partner Platon Lebedev on charges of stealing almost $30 billion worth of the oil that his Yukos company produced from 1998 to 2003 and laundering the proceeds. Lebedev also was sentenced to 14 years.

The judge said he could not have handed down a suspended sentence because the men present "a menace to society" and "their rehabilitation is possible only in the confined space of a prison."

Throughout the trial, Khodorkovsky and Lebedev were locked in a glass cage in the courtroom and guarded by a dozen special-forces officers, some armed with automatic weapons.

In his statement, read by Vadim Klyuvgant to reporters outside the courthouse, Khodorkovsky expressed some optimism, saying: "But we have not lost hope and nor should our friends."

Khodorkovsky also said the verdict showed that the "Churov rule" was alive and well, referring to a comment made a few years ago by Vladimir Churov, the chairman of the Central Election Commission, that his first rule was that Putin is always right. And if he's not, "it means I have misunderstood something."

"The judge was only the nominal author of the verdict," Klyuvgant said. "It makes no sense to give any assessment or analysis of a verdict where one sentence contradicts another in a sign that it had more than one author."

The defense lawyers said much of the judge's verdict was copied from the indictment and the prosecutors' final arguments.

When the sentence was announced in the courtroom, Khodorkovsky's mother burst out with an emotional "curse you and your children," seemingly directed at the judge.

"I believe that the judge is quite professional, and not stupid, so he couldn't write the nonsense that he read today himself. Obviously, he was subjected to pressure, and very strong pressure," Marina Khodorkovsky said.

Speaking outside the courthouse before the television cameras, she addressed her remarks to Medvedev. "Mr. President, a man of the same generation as my son, aren't you ashamed to be the servant of a conscienceless, immoral man," she said.

She urged the president to think about his own teenage son. "How will you explain that to him, how will you look him in the eyes, will you be able to justify your actions?" Marina Khodorkovskaya said. "It's not too late, and you still have time to step back and think."

Khodorkovsky's lawyers said they would appeal.

The defense called the charges ridiculous and said they reflected a lack of understanding of the oil business, including the payment of transit fees and export duties. Numerous witnesses, including current and former government officials, testified that Khodorkovsky could not have stolen what amounted to almost all of the oil Yukos had produced.

The charges also contradicted the first trial, in which Khodorkovsky was convicted of evading taxes on Yukos profits.

Danilkin's conduct during the trial had raised some hopes among Khodorkovsky's family and supporters that he would prove to be more independent than the judge in the previous trial, who openly supported the prosecutors.

Danilkin treated the defendants with respect, took notes during defense testimony and gave the appearance of being interested in establishing the truth in the case. He often joined the defense and the audience in laughing at prosecutors' gaffes and made sarcastic remarks about their evidence.

Those hopes were dashed as soon as Danilkin began to read the verdict.

"The court decision has nothing to do with the law or justice," said Boris Nemtsov, a former deputy prime minister who is now among the leaders of the opposition. "It's Putin's personal vendetta."

Khodorkovsky had angered Putin by funding opposition parties in parliament, which at the time had the power to oppose Kremlin policies and influence the choice of prime minister. He also pursued his own oil export plans independent of the state pipeline system, and publicly questioned the appearance of Kremlin corruption.

Criticism of the trial quickly began to pour in from the United States and across Europe.

"We remain concerned by the allegations of serious due process violations, and what appears to be an abusive use of the legal system for improper ends, particularly now that Khodorkovsky and Lebedev have been sentenced to the maximum penalty," said U.S. State Department spokesman Mark Toner.

"Simply put, the Russian government cannot nurture a modern economy without also developing an independent judiciary that serves as an instrument for furthering economic growth, ensuring equal treatment under the law, and advancing justice in a predictable and fair way."

Medvedev has made it his mission to modernize Russia by encouraging foreign investment, and an acquittal of Khodorkovsky or even a lighter sentence would have helped reassure businesses that Russia was prepared to strengthen protection of property rights.

"The impression remains that political motives played a role in these proceedings," German Chancellor Angela Merkel said in a statement. "This contradicts the intention repeatedly voiced by Russia of pursuing the road to the full rule of law."

The president of the European Parliament in Brussels said the longer prison sentence for Khodorkovsky showed that Russia still had a long way to go in its promised reform of the judiciary.

"The trials of Mikhail Khodorkovsky were the litmus test of how the rule of law and human rights are treated in today's Russia," Jerzy Buzek said in a statement. "In effect it has become the emblematic symbol of all the systemic problems within the judiciary."

The criticism was likely only to further anger Russia's government, which had responded to Western outrage over Monday's conviction by pointedly telling the U.S. and Europe to mind their own business.

During the appeal process, which could take months, Khodorkovsky and Lebedev will remain in a Moscow jail. After the first trial, Khodorkovsky was sent to a labor colony in eastern Siberia near the Chinese border, while Lebedev served the first part of his sentence in a prison above the Arctic Circle.

Auto industry recalled 20 million vehicles in 2010 Led by Toyota, automakers recalled about 20 million vehicles in US in 2010

Auto industry recalled 20 million vehicles in 2010

Led by Toyota, automakers recalled about 20 million vehicles in US in 2010

Ken Thomas, Associated Press, On Wednesday December 29, 2010, 6:11 pm EST

WASHINGTON (AP) -- Automakers recalled about 20 million vehicles in 2010, led by high-profile recalls by Toyota that prompted new scrutiny of the auto industry's safety record.

The number of recalls this year was the largest in the United States since 2004, according to an analysis of federal data by The Associated Press. The auto industry set a record with 30.8 million recalled vehicles that year.

Toyota Motor Corp. recalled about 7.1 million vehicles in 2010 to fix faulty gas pedals, floor mats that could trap accelerators, defective braking and stalling engines. The safety woes by the world's No. 1 automaker brought more attention to auto safety from government regulators and the public, which filed more than 64,000 complaints with the National Highway Traffic Safety Administration, nearly double the number in a typical year.

Safety recalls can cost car companies tens of millions of dollars or more and have become more common since 2000, when Congress passed legislation to spot safety defects more quickly in the aftermath of the massive Firestone tire recalls. In 2010, lawmakers held several hearings on the Toyota recalls but sweeping legislation to increase penalties against car companies, require automakers to meet new safety standards and empower the government to demand a recall stalled in Congress.

Toyota was fined $48.8 million by the government for its handling of three recalls dating back to 2004. Toyota has vowed to take a more proactive approach to safety, creating engineering teams that can quickly examine cars that are the subject of consumer complaints while giving its U.S. offices a more direct role in safety related decisions.

Toyota spokesman Brian Lyons said the company has "committed to be more responsive to our customers and federal agencies" and its recalled vehicles are getting fixed at a faster rate than the industry average of 72 percent recall completion after 18 months.

Among other automakers, General Motors Co. recalled about 4 million vehicles in 2010 while Japanese rivals Honda and Nissan both recalled more than 2 million cars and trucks. Chrysler recalled about 1.5 million vehicles and Ford called back more than 500,000 vehicles. The recall data was preliminary and the government was expected to release final numbers next year.

"More and more recalls are being voluntarily initiated by automakers and we think that's a good sign," Transportation Department spokeswoman Olivia Alair said Wednesday. "Safety is NHTSA's first priority and improved cooperation from automakers will help resolve safety issues more quickly and comprehensively."

Wade Newton, a spokesman for the Alliance of Automobile Manufacturers, which represents a dozen car companies, including GM, Toyota and Ford, said automakers "are doing a better job of identifying and pinpointing safety-related issues and taking faster action." He said safety advances in new vehicles helped traffic deaths decline last year to its lowest levels since 1950.

Skype adding Wi-Fi, 3G video calling to iPhone app Skype releasing new iPhone app that allows video calls over Wi-Fi, AT&T's 3G network

Skype adding Wi-Fi, 3G video calling to iPhone app
Skype releasing new iPhone app that allows video calls over Wi-Fi, AT&T's 3G network

SAN FRANCISCO (AP) -- A new version of the free iPhone app for Skype SA will let users make and receive video calls.

Users of the Internet calling and messaging service will be able to use both Wi-Fi and AT&T Inc.'s 3G cellular network. FaceTime software, which comes with iPhones, works only with Wi-Fi.

The app, which is being released Thursday through Apple Inc.'s iTunes Store, will let iPhone 4 and iPhone 3GS users make free video calls to other Skype users who are using the app or have access to the feature using Skype on their computer or other video phone.

Those with the latest iPod Touch will be able to make video calls over Wi-Fi. The app allows the iPad and previous-generation iPod Touch to receive video calls, too, Skype said.

Skype's software offers free services such as voice or video calls to other Skype users.

Users pay to do things such as make calls from a PC to a landline or cell phone.

In the first half of 2010, video calls made up 40 percent of all minutes spent using Skype's free calling services, the company said.

The iPhone 4, which was released in June, was the first iPhone to include a front-facing camera for video chat. It includes FaceTime, which enables users to make video calls to others who have the iPhone 4, the latest iPod Touch or a Mac computer. So far, however, FaceTime doesn't work over the cellular network and doesn't allow calls to Windows-based computers.

Skype, which is based in Luxembourg, is not the first third-party app for the iPhone to allow free video calling over AT&T's cellular network. Apps such as Fring and Tango offer the capability as well, although neither has as many users as Skype.

The updated app comes about a week after Skype suffered a major service outage that lasted 24 hours and cut off service for millions of users. On average, 124 million people use Skype each month, though the total number of registered users is more than four times that.

In a Wednesday post on the company's blog, Skype's chief information officer, Lars Rabbe, said the problem was caused by a bug in a version of Skype's software for computers running Microsoft Corp.'s Windows operating system.

China to go after Internet phone services China plans to go after Internet phone services in move to protect state-owned telecoms

China to go after Internet phone services
China plans to go after Internet phone services in move to protect state-owned telecoms

BEIJING (AP) -- China is going after Internet phone services such as Skype in a move to protect the country's state-owned telephone companies, causing alarm among consumers who rely on cheap Internet calls.

A notice by the Ministry of Industry and Information Technology on its website this month says it's working to fight "illegal Internet phone services" but doesn't specify any actions.

Experts say companies like Skype operate in a legal gray area and that the notice is a warning to them not to grow too big or to challenge the state-owned telecoms.

China, which on Thursday announced its number of Internet users rose to 450 million this year, also has a strong interest in exercising tight control over information, and Skype has been a popular tool with activists and others who want to share information relatively freely.

The ministry's move, however, also has business in mind. China has said only state-owned telecoms China Telecom and China Unicom have the right to offer Internet phone services for calls that link telephones and computers.

But few do. The country's major telecoms have been offering Internet phone services only on a trial basis in four cities, according to Kan Kaili, a director of China VoIP & Digital Telecom Inc., a company that has offered Internet phone services. That leaves the market to the hundreds of small-scale companies have sprung up.

"This notice is actually protecting the telecoms' traditional voice services," said Kan, who is also a professor at the Beijing University of Post and Telecommunications. It's "obviously a wrong thing, absolutely wrong."

The ministry's move is a warning to Skype and similar companies not to expand too much in China, said Wang Yuquan, chief consultant for research firm Frost and Sullivan in Beijing.

"If the ministry hadn't made this announcement, I think Skype would have offered its services in a very large scale. Now, with the announcement, it can't," he said.

Skype did not immediately respond to a request for comment. Telephones at the ministry rang unanswered Thursday evening.

China's number of Internet phone users is not known, but a commentary in the Beijing News on Thursday estimated it at 15 million.

Pew study hints at what Web users will pay for Pew study hints at what Web users will pay for; music, software top the list

Pew study hints at what Web users will pay for

Pew study hints at what Web users will pay for; music, software top the list

NEW YORK (AP) -- The Web may seem like the land of something for nothing. Free video. Free news. Even free tools such as word processing and spreadsheets.

But almost two-thirds of adult Internet users in the U.S. have paid for access to at least one of these intangible items online, according to a new survey from the Pew Internet and American Life Project.

Whether people will pay for different types of material on the Web is among the most pressing questions facing media companies in the 21st century.

As people shift their attention to the Internet from more traditional ways of enjoying media, the companies that provide everything from movies to mystery novels want to make sure they can still get paid for what they do. The big TV networks want viewers to pay for full access to episodes of their favorite shows. Newspaper companies want readers to pay for news. Book publishers want higher prices for digital editions of new releases.

The new figures from Pew suggest paying for content online is at least not a completely foreign idea for most people.

About a third of respondents said they have paid for digital music. Same for software.

Behind that came mobile apps for cell phones or tablet computers at 21 percent. Then digital games at 19 percent and newspaper, magazine or journal articles at 18 percent.

The survey found that among people who paid for content, the typical user spent about $10 a month. However, there are some extremely high-end users, such that the average among those who have paid for content is about $47 a month. That includes subscriptions and individual files downloaded or accessed.

The survey of 755 Internet users in the U.S. was conducted Oct. 28-Nov. 1 and has a margin of sampling error of plus or minus 4 percentage points.

Minimum wage earners in 7 states getting raises Minimum wage earners in 7 states are getting New Year's raises as the cost of goods goes up

Minimum wage earners in 7 states getting raises

Minimum wage earners in 7 states are getting New Year's raises as the cost of goods goes up

Kristen Wyatt, Associated Press, On Thursday December 30, 2010, 12:02 pm EST

DENVER (AP) -- It will be a happier New Year for nearly 650,000 workers earning minimum wage. They're getting small raises in seven states that tie their salaries to the cost of living.

The minimum wages in those states will go up between 9 cents and 12 cents an hour Saturday because their consumer price indexes rose in 2010.

The extra pennies can't come soon enough for Joe Martinez of Denver, who works odd jobs such as lawn maintenance for minimum wage. In Colorado, the wage is rising 11 cents, from the federal minimum of $7.25 an hour to $7.36 an hour.

"The prices of everything are going up -- food, rent, electricity," Martinez, 55, said on his lunch break Wednesday. "I know it's not a lot of money, but any extra money will help, you know?"

Poverty advocates say the rising minimum wages shouldn't be seen as raises, just adjustments to keep the working poor at the same level as prices of goods rise.

The National Employment Law Project, a New York-based advocate for workers, estimates that about 647,000 people will see their paychecks go up in Arizona, Colorado, Montana, Ohio, Oregon, Vermont and Washington.

"It just ensures minimum wage keeps pace with the rising costs of necessities like milk and bread and gas," said Paul Sonn, legal co-director for NELP.

The NELP and other workers' advocates helped block a legal challenge to a minimum wage hike in Washington. That state will have 2011's highest statewide minimum wage at $8.67 an hour.

"These people are not putting this money into IRAs and savings accounts. It goes right back into the economy," said Rick S. Bender, president of the Washington State Labor Council, a union group that represents about 400,000 workers.

Ten states schedule their minimum wages to rise automatically when the cost of living rises, but the cost of living didn't rise enough in Florida, Nevada and Missouri to trigger a wage hike.

In Colorado, the minimum wage hike next year is especially welcome. Unlike most states, Colorado's adjustable wage can drop because of deflation. A year ago, it fell 3 cents an hour to the federal minimum of $7.25 an hour.

It was the first time a state's minimum wage has dropped since the federal minimum wage law was adopted in 1938, although many employers left wages unchanged rather than cut workers' pay.

"The last couple years have been brutal for everybody, for all workers, not just minimum-wage workers," said Rich Jones, director of policy and research at the Denver-based Bell Policy Center, a progressive research group. However, Jones said that even small upticks in the minimum wage can help keep poor people working.

"For the lowest-paid workers, at least they're still able to buy the same level of goods and services in the marketplace, so it is a help," Jones said.

Retail clerk Kimberly Bobian of Denver agreed. Bobian stopped by a corner grocery to pick up a can of tomato sauce and said it's hard to keep her pantry stocked on the federal minimum wage.

"It's going up 11 cents? That's a big deal, definitely," she said. "Food prices are going up, everything goes up, so any little bit helps."

Stocks down as investors worry over mortgage rates Stocks edge lower as investors worry over mortgage rates, brush aside positive economic data

Stocks down as investors worry over mortgage rates

Stocks edge lower as investors worry over mortgage rates, brush aside positive economic data

NEW YORK (AP) -- Investors are brushing aside some positive economic news on lingering concerns over the housing market.

But while U.S. markets were in negative territory Thursday, stocks are likely to end the year on an upbeat note: The S&P 500 index is up 12 percent and the Dow is up 11 percent in a year marked by big corporate profits. The Dow is back to levels last seen in August 2008, prior to the heat of the financial crisis, while the S&P might just eke out the best December in 20 years, if it manages to go back to positive territory.

At midday, the Dow Jones industrial average was off 23.73 points, or 0.2 percent, to 11,561.70. The S&P 500 edged down 2.64, or 0.2 percent, to 1,257.14, while the technology-focused Nasdaq composite index fell 3.98, or 0.2 percent, to 2,662.95.

The week has been thinly traded, and Thursday is effectively being considered the last trading day of note because of the spate of economic data and also because even fewer traders are expected to show up on Friday, the last day of the year.

Despite the strong corporate profits recorded during the year, economists have been worried about the stubbornly high rate of unemployment at 9.8 percent. Thursday's report from the Labor Department should offer some relief.

The number of Americans applying for unemployment benefits fell to its lowest point in nearly two and a half years, a sign that the job market is slowly improving. Applications dropped by 34,000 to 388,000, the fewest since July 2008, the Labor Department said Thursday. Unemployment claims generally predict where the job market will go over the next few months.

In further positive news, the Chicago Purchasing Managers Index for December showed that companies in the Midwest were faring better. The index, which surveys business conditions in the states of Illinois, Indiana and Michigan, came in with a reading of 68.6, up from 62.5 in the previous month. Economists had been expecting the index to drop to 61.

Home sales also fared well. The National Association of Realtors said the number of people who signed contracts to buy homes rose in November, the fourth increase since contract signings hit a low in June. Its index of sales agreements for previously occupied homes increased 3.5 percent.

However, with mortgage rates creeping up, investors worried over its effect on home sales. The average rate on 30-year fixed mortgages rose this week to 4.86 percent, the highest level in seven months.

U.S. Treasurys are also down slightly, which has led to a slight bump up in yields. The benchmark 10-year bond is yielding 3.39 percent, up from 3.35 at Wednesday's close.

Signed contracts to buy homes up 3.5 pct. in Nov.

Signed contracts to buy homes rises 3.5 pct. in Nov., but sales on pace to post 13-year low

NEW YORK (AP) -- The number of people who signed contracts to buy homes rose in November, the fourth increase since hitting a low in June. Even with the gains, this year is shaping up to be the worst for home sales in 13 years.

The National Association of Realtors says its index of sales agreements for previously occupied homes increased 3.5 percent last month from a downwardly revised reading in October. Contract signings were up in the West and Northeast, but down in the South and Midwest.

Signings are 22.1 percent above June's index reading, which was the lowest level since the private group began tracking the data in 2001. But signings are 5 percent lower than November 2009 when buyers were scrambling to close purchases to qualify for the first federal tax credit.

Completed home sales -- which the Realtors group measures in a separate report -- are expected to total about 4.8 million units this year. That's much lower than the 6 million units that analysts consider a healthy pace. The last time sales were lower was 1997 when sales totaled 4.4 million units.

A third of the pending sales likely will be foreclosures or short sales, where a homeowner sells a house for less than what is owed on it, the NAR spokesman Walter Molony said. That tracks with the average for the year. These distressed sales go for discounts of up to 50 percent in some of the hardest-hit areas and will continue to weigh down home prices.

Many economists expect home prices to drop another 5 percent to 10 percent in the next six months before stabilizing. Prices fell in 20 of America's largest cities in October, according to the Standard & Poor's/Case-Shiller home price index released Tuesday.

There are several challenges facing the housing market aside from foreclosures. Potential buyers are worried about their jobs or are unable to qualify for a mortgage because lenders have tightened standards. And now mortgage rates are on the rise, gaining about two-thirds of a percentage point in the last month.

This week, the average rate on 30-year home loans rose to 4.86 percent from 4.81 percent, mortgage giant Freddie Mac said Thursday. That's the highest level in seven months. It hit its lowest level in 40 years in November at 4.17 percent. The rate on the 15-year mortgage, a popular refinance option, also is rising.

The report on contract signings from the Realtors showed that signings jumped 18.2 percent in the West and edged up 1.8 percent in the Northeast. The Midwest region saw a 4.2 percent drop in signings in October and the South posted a 1.8-percent dip.

PARAMUS, N.J. (AP) -- The Goodwill store in this middle-class New York suburb is buzzing on a recent weekend afternoon. A steady flow of shoppers comb

Asian stock markets mixed despite jump in US jobs

Asian stock markets mixed after US musters only tiny gains despite strong jobs report

TOKYO (AP) -- Asian stock markets were mixed Monday as investors took a pause after last week's big gains with losses tempered by a surprise jump in U.S. employment.

Japan's Nikkei 225 stock average was up 96.67 points, or 1 percent, at 9,722.66 while South Korea's Kospi was off 0.4 percent at 1,931.34.

Hong Kong's Hang Seng shed less than 0.1 percent to 24,870.30 and China's Shanghai Composite Index added 0.4 percent to 3,141.38. Australia's S&P/ASX 200 slipped 0.3 percent to 4,786.10.

Elsewhere, markets in Singapore and Indonesia rose while Taiwan's benchmark fell.

Global stocks and commodities rallied last week after the U.S. Federal Reserve on Wednesday announced it would sink $600 billion into buying Treasurys over the next eight months to stimulate the sluggish economy by lowering long-term interest rates.

But the rally ran out steam by Friday in the U.S. with shares in New York squeezing out only narrow gains despite a surprisingly positive jobs report.

The Labor Department said employers added 151,000 jobs in October, the first gain since May and far more than analysts had anticipated.

Even with the surge, the U.S. national employment rate remained at 9.6 percent for the third straight month, and shares ended barely higher.

The Dow closed up 9.24, or 0.1 percent, at 11,444.08. The broader Standard & Poor's 500 index edged up 4.79, or 0.4 percent, to 1,225.85, and the Nasdaq composite index edged up 1.64, or 0.1 percent, to 2,578.98.

In currencies, the dollar fell to 81.16 yen Monday from 81.25 yen in New York late Friday. The euro fell to $1.3961 from $1.4031.

Benchmark oil for December delivery was up 3 cents at $86.88 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose 36 cents to settle at $86.85 on Friday.

(This version CORRECTS Corrects oil settle price in last paragraph to $86.85.)

Investors looking for safer places to stow their assets pushed gold to a record price above $1,400 an ounce Monday as they become more worried about t

In a tough economy, old stigmas fall away

In a bad economy, old stigmas no longer apply; Americans less shy about layaway and off-brands

PARAMUS, N.J. (AP) -- The Goodwill store in this middle-class New York suburb is buzzing on a recent weekend afternoon. A steady flow of shoppers comb through racks filled with second-hand clothes, shoes, blankets and dishes.

A few years ago, opening a Goodwill store here wouldn't have made sense. Paramus is one of the biggest ZIP codes in the country for retail sales. Shoppers have their pick of hundreds of respected names like Macy's and Lord &Taylor along this busy highway strip.

But in the wake of the Great Recession, the stigma attached to certain consumer behavior has fallen away. What some people once thought of as lowbrow, they now accept -- even consider a frugal badge of honor.

EDITOR'S NOTE -- The Great Recession has been over for nearly a year and a half, and the economy is slowly growing again. But many of the drastic changes that Americans made in how they spend money have endured -- and may be here to stay, some economists think. In a three-part series, The Associated Press examines the state of the American consumer.

And it's not just about Goodwill. Americans, even those with jobs, are shopping for brands, buying at stores and eating at restaurants that they shunned before because they are trying to get more for their money.

At the supermarket, shoppers are buying more store-labeled products, like no-name detergents and cereal, and not returning to national brands.

And in a telling trend, Americans are turning to layaway more often when they buy expensive items such as engagement rings and iPads. The wealthy are also using layaway more often, a drastic change from the past.

"The old stigmas are the new realities," says Emanuel Weintraub, a New York-based retail consultant. "Now, people don't have a problem saying, 'I can't afford it.' It's a sign of strength."

At the Goodwill in Paramus, even financially secure shoppers are showing up. One is Heather Dzielinski, from nearby Ramsey, N.J., who had donated things to Goodwill but never shopped at one of its stores until the Paramus location opened in July.

A pair of L.L. Bean fur-lined slippers for $8, far below the $50 retail price, got her hooked. She thought a Goodwill store would be dark and dingy, but it wasn't.

"This store is a lot different than what I thought it would be, and that impressed me," Dzielinski said during a recent visit. She picked up two shirts for her son costing about $4 each.

Thrift and consignment stores are thriving, so much so that some high-end retail stores are carving out space for second-hand goods as a way to offset weak sales of their full-price merchandise.

This behavioral shift is pronounced at the nation's supermarkets. Store-branded groceries now make up 22 percent of total sales, up from 20 percent before the recession, according to The Nielsen Co. The private-label business is worth $500 billion a year, so even a 2 percentage point change means $10 billion.

Improved quality has helped drive the growth, but price also plays a big role. Supermarkets that stock almost all store-brands are thriving. One is Aldi, a chain of more than 1,000 stores in the Midwest and on the East Coast.

At an Aldi location in Chicago on a recent evening, shoppers didn't care that the only recognizable brands were the Splenda sweetener, a Butterball turkey and a few kinds of candy.

Six no-name grocery items -- macaroni and cheese, potato chips, cream cheese, sour cream, olive oil and guacamole -- cost about $10. The same six brand-name items cost $22 at the nearby Dominick's.

"I started realizing that I could save $20 shopping here for my groceries, and I liked the products," says Aline Silberg, a mother of two who works as a massage therapist and started coming to Aldi during the recession. "I stopped caring that they weren't brands I knew."

People are learning to live with trading down on clothes, too. Jaime Palmer of Dallas used to go to Neiman Marcus and spend as much as $300 on dress shirts by such high-end designers as Hugo Boss and Thomas Pink.

Now, Palmer, a 36-year-old a managing partner at an investment boutique, buys from a new label called J. Hilburn, which customizes dress shirts for a much lower price -- $120. As for his suits, he's turning to outlets.

"You don't get the service. They don't bring you coffee," he concedes. "It did have a bit of a stigma for me." But living through the Great Recession has made him reassess how he shops, he says.

"All of a sudden you feel mortal," he says. And even though business has stabilized and Palmer's own personal portfolio has rebounded, "my spending patterns will probably be a lot more conservative for the rest of my life."

The search for value is also helping sales at fast-food restaurants like McDonald's. Driving some of the sales gains are wealthy Americans who are eating at such establishments more often than before the recession.

New research from American Express found that the super-affluent, which it defines as those who put at least $7,000 a month on their credit cards, spent 24 percent more on fast-food last spring than the year before. They spent 12 percent more on fine dining.

Back in Paramus, the packed racks at Goodwill are sorted by style and color, much like a department store. Black pants all hang together. Sets of dishes are displayed on a large rack. The merchandise contains some recognizable names -- Ann Taylor, Gap, Ralph Lauren, Lilly Pulitzer. Women's shirts sell for $5.29, half that if they're the color of the week.

The Paramus store is one of 100 new locations for the nonprofit Goodwill. Many are in middle-class suburbs. The strategy: Attract not only people in need, but also the many Americans who are looking for more value when they shop. Revenue this year is up 11 percent.

"We're increasingly seeing our shoppers and donors can be the same people," says Jim Gibbons, who is CEO of Goodwill Industries International, based in Rockville, Md.

A similar scenario plays out on Manhattan's Upper East Side, where wealthy women who tend to frequent high-end boutiques are increasingly showing up at consignment shops looking for designer brands like Chanel and Gucci for less.

To fight back, some retailers are adding consignment to their stores. In the tony Boston suburb of Winchester, Mass., upscale clothing merchant T. Michaels began offering consignment a few months ago as a way to make up for weak sales. Locals drop off high-end clothes in pristine shape -- some even have the tags still attached. When the shop sells them, the two split the profit.

Two years ago, having second-hand clothes in the same store that sells regular-priced goods might have driven well-heeled shoppers away. Today, the concept works. The new consignment area, called My Secret Closet, has brought in new customers. Shoppers browse both the retail and consignment areas without hesitation.

"We are seeing a permanent change in how people shop, and we have to respond to that," says Tom Patrolia, who has owned the store for 24 years.

The growth in layaway also reflects Americans' new willingness to set aside old shopping stigmas. Layaway, which lets shoppers pay over time while the store holds the item, had its roots in the Great Depression. It became passe in the past two decades with the rise of credit cards.

Toys R Us expanded its layaway program this year after seeing strong demand last holiday season. Two years ago, it didn't exist. Now customers are using it to pay for outdoor gym sets, bicycles and baby-related goods such as cribs and changing tables.

At online site eLayaway.com, the average price of goods on layaway now runs around $460. Expensive items like the latest gadgets and expensive tickets to sporting events are becoming more common, as the website attracts higher-income consumers. More than 40 percent of its customers have income above $60,000. Before the recession, it was just 8 percent, says founder and chief marketing officer Sergio Pinon.

Shoppers at Davis Jewelers in Louisville, Ky., used to be embarrassed when the sales help would suggest layaway for engagement rings, which start at $3,000, says saleswoman Erica Samelson. Now more shoppers are asking to pay through layaway because they can't rack up big balances on their credit cards or get bank loans.

"For the first time, I am hearing lots of people bringing it up," she says.

D'Innocenzio reported from New York.

Ambac files for bankruptcy under Chapter 11

Ambac fails to get structured agreement or raise capital, files for bankruptcy

DES MOINES, Iowa (AP) -- Bond insurer Ambac Financial Group Inc. said Monday that it has filed for Chapter 11 bankruptcy protection after it failed to raise additional capital.

The embattled company also failed to arrange a structured bankruptcy agreement with senior debt holders.

It has tried for two years to regain its footing after getting pummeled by the collapse of the housing market.

The company continues to operate under the jurisdiction of the bankruptcy court.

As of June 30, it had $1.62 billion in debt. Assets were listed in bankruptcy court documents as $394.5 million.

The bankruptcy filing halts any debt claims. The company also is seeking a court declaration that would wipe out its tax liability for tax years 2003 through 2008 and that would allow it to keep the tax refunds it received for those years.

Documents were filed in the U.S. Bankruptcy Court for the Southern District of New York.

The Vanguard Group Inc. was listed as holding 5.46 percent of the company's stock, or 16.5 million shares.

The shares are spread across seven funds and no single fund owns more than 5 percent, documents said.

Creditors holding the largest 20 unsecured claims include BNY Mellon, which held about $1.6 billion in unsecured notes.

The city of New York claimed a $42.3 million disputed tax assessment.

Several businesses claimed trade debt including Algorithmics Inc., which claims $81,656; RR Donnelly, $14,000; and Bloomberg LP at $6,602.

Ambac, which is based in New York, had said just a week ago that it planned to file for bankruptcy protection either through a prepackaged plan arranged with senior debt holders or through Chapter 11 proceedings.

A statement released late Monday indicated that an agreement with debt holders could not be reached.

However, Ambac has agreed to a nonbinding term sheet that will serve as a basis for further negotiations with the debt holders and that may allow the company to emerge from bankruptcy more quickly.

The company's stock traded above $95 a share in the spring of 2007, before the housing bust.

Shares closed at 52 cents Monday then fell 32 cents in aftermarket trading.

In March, Wisconsin regulators took over some of the most troubled assets of Ambac's main operating subsidiary, Ambac Assurance Corp., which is based in that state. Regulators feared the company would run out of money paying claims on policies related to risky structured finance transactions. Those include the credit default swaps and residential mortgage-backed securities held by major Wall Street banks that helped to accelerate the national financial crisis.

Bond insurers traditionally offered insurance mainly to government entities for debt that covered infrastructure construction and other municipal projects, but that changed as investors began betting on complex structured finance products like mortgage-backed securities in the late 1990s. The collapse of that market as foreclosures skyrocketed left Ambac and several competitors teetering when they were left on the hook for more coverage than they could financially handle.