World airlines seen losing $9 billion this year

KUALA LUMPUR, Malaysia – The world's airlines will collectively lose $9 billion this year — nearly double the previous projections — and face a slow recovery as the economic crisis saps air travel and cargo demand, an industry body warned Monday.

The International Air Transport Association, which represents 230 airlines worldwide, increased its loss estimate from the $4.7 billion it forecast in March, reflecting a "rapidly deteriorating revenue environment."

Although there has been growing signs of a bottoming out of the recession, IATA said the industry was severely hit in the first quarter with 50 major airlines reporting losses of more than $3 billion. Weak consumer confidence, high business inventories and rising oil prices pose headwinds for future recovery, the association said during a two-day global aviation conference in Kuala Lumpur.

Revenues are expected to decline by $80 billion — an unprecedented 15 percent from a year ago — to $448 billion this year, and the weakness will persist into 2010, it said.

"There is no modern precedent for today's economic meltdown. The ground has shifted. Our industry has been shaken. This is the most difficult situation that the industry has faced," said IATA Chief Executive Giovanni Bisignani. The Geneva-based association also revised its estimated loss for last year to $10.4 billion from $8.5 billion previously.

It said passenger traffic for 2009 is expected to contract by 8 percent from a year ago to 2.06 billion travelers. Cargo demand will decline by 17 percent and some 100,000 jobs worldwide are at risk, it said.

The association expects the industry fuel bill to shrink by $59 billion, or 36 percent, to $106 billion this year, accounting for 23 percent of operating costs with an average oil price of $56 a barrel. But crude oil prices have rallied in recent weeks, breaching the $70 a barrel level on Friday on hopes of economic recovery.

Bisignani urged governments to avoid protectionist policies and reiterated his call for more liberalization such as the lifting of restrictions on routes and cooperation between airlines to bolster the global airline industry.

"It would be a cheap and effective stimulus...liberalizing key routes today would create 24 million jobs and $490 billion in economic activity," he said.

Over the next three years, he said about 4,000 aircraft are scheduled to be delivered. This year alone, airlines are expected to spend about $25 billion to take delivery of more than 800 Western-built jets, draining cash for a second straight year.

"Aircraft ordered in good times are being delivered in recession," Bisignani said. "Finding customers to fill them profitably will be a challenge."

IATA said carriers in all regions were expected to report losses, with Asia-Pacific to be the hardest hit amid a sharp slowdown in its three key markets — Japan, China and India. The region's carriers are expected to post losses of $3.3 billion, worse than the previous forecast of $1.7 billion but better than the $3.9 billion losses last year.

North American carriers are expected to lose $1 billion, far better than its $5.1 billion losses in 2008, thanks to early capacity cuts and limited hedging by U.S. airlines.

Despite strong traffic, Middle East carriers will see losses deepen to $1.5 billion as the region's intercontinental hubs are vulnerable to recessionary impacts in Europe and Asia.

A collapse for demand in premium services in all major markets will see European airlines lose $1.8 billion. Latin American carriers are expected to lose $900 million and African airlines $500 million.

World Bank sees 3.0% global contraction

WASHINGTON (AFP) - – The World Bank said Thursday the global economy is set to contract some 3.0 percent this year, sharper than previously estimated, urging more aid for developing countries amid the spreading crisis.

The latest growth estimate marked a significant revision to the bank's prior estimate of a 1.75 percent contraction in late March and came ahead of a two-day meeting of Group of Eight (G8) finance chiefs that opens Friday in Lecce, Italy.

"Financial markets seem to have broken the fall over past months but there are clear fragilities, and risks remain," World Bank president Robert Zoellick said in a conference call with reporters.

"The developed economies seem to be contracting at a slower pace but the effects of the global economic downturn are rippling through the world and still very much hurting developing countries," he said.

The World Bank will be revising its gross domestic product (GDP) growth estimates in the next few weeks, he added.

Zoellick said the Washington-based development lender expected to see continuing "wave effects" from the steep downturn that will pound the most vulnerable countries and populations the hardest.

"Unemployment is still rising in both the developed and developing world," he noted, adding that the rise signals "there's the danger of destablization and even the return of risk of conflict."

The global financial crisis that began in the United States home mortgage market in August 2007 and accelerated with the collapse of Wall Street investment bank Lehman Brothers in September has now infiltrated the developing world, he said.

"We're starting to see factors like the increase of the nonperforming loans in the African economy as the downturn in financial markets in the developed world hit the real economy and then it moves to the real economy in the developing world and now it's hitting the financial sector in the developing world," Zoellick said.

"What I hope to do in this coming G8 meeting is give an update on where we see the challenges for the developing countries over the next 12 months or so," he said.

He said funding was "particularly critical" for the bank's International Development Association (IDA), the arm that focuses on the 78 poorest countries.

Demand for IDA grants and interest-free loans is on track to total more than 13 billion dollars, a record high, for fiscal year 2009 that ends on June 30, compared with 11.2 billion last year.

In response to a question whether he would lobby for IDA funds at the G8 meeting, Zoellick said the United States and Italy "have to take some additional steps."

Countries need to continue to provide financial support for developing countries, "even" Mexico and Indonesia, and "for a longer period than people had expected, he said.

Zoellick warned that the downturn was severely straining post-conflict countries, citing Haiti, Liberia and Afghanistan.

"These are the countries that are often very dependent on commodity exports, remittances, development assistance to deal with emergency or security issues -- and all of these are under stress," he said.

The 185-nation bank estimates it will provide between 50 to 60 billion dollars in lending over fiscal 2009.

Zoellick in a statement urged G8 meetings this month and in July to "follow up on the promises made at the Group of 20 meeting in London in April to restore domestic lending and the international flow of capital."

Miss California Carrie Prejean Fired Playboy Photos

The celebrity model Miss California Carrie Perjean has been fired today for posing playboy and this time Donald Trump couldn’t have anything to do for her. And Carrie Prejean can’t hold the crown not any more. Yesterday it was announced that the beauty queen who survived a scandal over semi-naked photos and her controversial stand on same-sex marriage, will be fired.

According to TMZ, Prejean claims pageant honcho Keith Lewis actually asked her last month if she would take two gigs — appearing on “I’m a Celebrity … Get Me Out of Here!” and Playboy. Prejean says Lewis told her Playboy offered $140,000 for her to pose semi-nude. She rejected both offers.

Carrie Prejean said:

They wanted me out and they got what they wanted

A few minutes ago we talked to Lewis who said he was not pushing her to take either gig — but merely passing the offers along. Lewis said Prejean had insisted they not turn anything down without running it by her.

Prejean — who told us she was “shocked” at the news she was fired and learned about it only after we broke the story — tells us she has been more than cooperative with pageant officials.

Prejean says, “What’s behind this I think is a political debate. They don’t agree with the stance that I took [on Prop 8]. Shanna [Moakler] is trying to bash me. They don’t like me. From day one they wanted me out and they got what they wanted.”

Prejean also told us she couldn’t believe Donald Trump would say she treated people in the pageant “like s**t.” For the record, Trump did tell Harvey Levin that on the phone earlier today. Prejean said if Trump really feels that way she’s sorry, adding: “I’ve shown respect for every party involved, even when they haven’t shown it back.”

Prejean went on: “I was very respectful of people even when they slandered me and humiliated me. I have not once stooped down to their level.”

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Fiat closes Chrysler deal; new management team named

DETROIT/MILAN (Reuters) – Fiat SpA closed its acquisition of Chrysler's strongest assets on Wednesday, a key step in the Italian carmaker's ambitious plan to create a global player to ride out the worldwide auto sales downturn.

The Fiat and Chrysler announced deal revives the 84-year old U.S. automaker that had been down to its last dollars before government intervention in late 2008 and completes an Obama administration-directed fast-track reorganization for Chrysler.

Other parts of Chrysler will remain in bankruptcy to be sold or closed.

Fiat Chief Executive Sergio Marchionne became CEO of the new Chrysler Group LLC on Wednesday. The automaker's former CEO, Bob Nardelli, will return to Cerberus Capital, the former majority owner of Chrysler, as an adviser.

Chrysler's former vice chairman and president, Jim Press, has been named Marchionne's deputy chief executive, and Fiat's chief financial officer, Richard Palmer, has been named CFO of the new company.

In a memo to employees, Marchionne voiced optimism about the new company's outlook.

"There is no doubt in my mind that we will get the job done," he said. He called the alliance a "bold first step to implement" lessons learned.

Marchionne added that Fiat will begin the process of transferring Fiat's technology, platforms and powertrains to Chrysler plants in the next few months.

In addition to Fiat, Chrysler Group LLC is owned by a union-aligned trust and the U.S. and Canadian governments in taking over the best parts of Chrysler.

The White House welcomed the completion of the deal and said the new alliance was "poised to emerge as a competitive, viable automaker."

The Canadian government said a restructured Chrysler is good for the Canadian auto parts supply chain and for Canadian consumers.

The completion of the Chrysler sale in roughly the time frame planned has been seen by analysts as a good omen for the prospects of completing a similar process for General Motors Corp, which filed for bankruptcy on June 1.

The GM sale is expected to take longer due to the size and complexity of the No. 1 U.S. based automaker. GM will be majority owned by the U.S. government when its sale is completed.

SUPPLIER TALKS

Chrysler filed for bankruptcy on April 30 and halted production to work through the sale to Fiat, heightening pressure on auto parts suppliers that already had sustained losses due to production cuts at automakers in North America.

Chrysler said it would resume production soon, but did not give a time frame. GM also halted significant production starting in mid May for several weeks.

U.S. and Canadian auto suppliers are under heightened pressure as U.S. auto sales remain at their lowest level in 27 years. U.S. sales are down 36.5 percent in the first five months of 2009.

The Obama administration's autos task force was meeting with parts suppliers on Wednesday as part of its effort to monitor the auto supply base, a Treasury spokesperson said.

"Today's meeting is part of our ongoing commitment to work with the companies and monitor the auto supply base going forward," the spokesperson said.

U.S. suppliers had submitted a formal request to the U.S. Treasury for $18.5 billion in emergency funding, saying they have been shut off from credit at a time when payments from automakers are declining rapidly.

Shares of several large U.S. auto parts makers rose sharply on Wednesday after the Chrysler deal completion erased fears that it could face liquidation if the deal did not go through and eased concerns over whether some auto suppliers could survive the current downturn.

Separately, a senior member of the Treasury task force responsible for overhauling the auto industry, Ron Bloom, was asked to explain to Congress its rationale for decisions that lead to bankruptcies at both GM and Chrysler.

The Obama administration must provide a clear explanation of how it plans to extricate the government from ownership stakes in GM and Chrysler, Senate Banking Committee Chairman Christopher Dodd said on Wednesday.

U.S. Senator Richard Shelby, a persistent critic of the auto bailouts and the top Republican on the Senate Banking Committee, said he was not sure government could remain a silent partner in GM and Chrysler and protect taxpayers.

Shelby also said that Treasury needed to be thinking about an exit strategy from its GM and Chrysler ownership stakes.

Meanwhile, Several lenders that provided bankruptcy funding to auto parts supplier Delphi Corp are seeking to make their own competing offer for the company, their lawyers told a U.S. bankruptcy court on Wednesday.

Delphi, which was spun off from GM in 1999 and filed for bankruptcy in 2005, said last week it reached a deal to sell most of its global operations to private equity firm Platinum Equity, allowing the car parts supplier to emerge from Chapter 11 bankruptcy protection.

(Additional reporting by Giancarlo Navach, David Bailey and Soyoung Kim; Editing by David Cowell, Patrick Fitzgibbons, Matthew Lewis and Carol Bishopric)

Chinese exports plunge 26.4 percent in May

BEIJING (AP) -- China's exports plunged in May for a seventh month as the global downturn battered trade, while imports also dropped sharply, the government reported Thursday.

May exports fell 26.4 percent from a year earlier, the customs agency reported. That was sharper than April's 22.6 decline and far below March's 17.2 percent contraction.

Chinese trade collapsed in late 2008 as the global economic crisis cut into demand for Chinese exports. The slump forced thousands of factories to close and threw millions of migrants out of work.

The government is trying to shield China from the downturn by pumping up domestic consuption with a 4 trillion yuan ($586 billion) to pump money into the economy through higher spending on public works construction and other initiatives.

May imports dropped by 25.2 percent, the agency said. That was worse than April's 23 percent fall and matched March's decline.

The decline suggested Chinese demand for iron ore, industrial components and other foreign products is still weak.

General Administration of Customs of China (in Chinese): http://www.customs.gov.cn

Top Industry Sectors to Grow Your Money

SAN DIEGO (ETFguide.com) - We've already reached the half-way point of the year and the top performing U.S. industry sectors are rising much higher than many people, even Wall Street's leading economists and analysts previously thought. Even though the economic recession is far from over, astute investors are profiting. Are you?

Boosted by a rising market, the money invested in ETFs finished the month of May on a very strong note, up by $53 billion. Much of the greatest interest in ETF investing is in funds that narrowly invest in specific industry sectors. Energy and technology stocks are just two examples of sectors that have performed well so far this year. Today, there are 205 industry sector ETFs and that doesn't even include the 90 or so leveraged and short ETFs focused on specific sectors.

So far for the year, five of the nine S&P 500 industry sectors are in positive territory. This is a dramatic reversal from last year when all nine S&P sectors posted double digit market losses.

Let's analyze three of this year's top performing industry sectors.

Materials Select Sector SPDR (NYSEArca: XLB)

The basic materials sector is one of the S&P 500's smallest. XLB represents just 3.66% within the S&P. Nevertheless, this tiny sector has given investors the best pop for their money this year, gaining 21.81%. This sector includes industries such as chemicals, construction materials, containers and packaging, metals and mining, and paper along with forest products. Among its largest components are Monsanto, E.I. DuPont de Nemours & Co., and Dow Chemical Co.

Year-to-date, XLB has soared 21.81%. In 2008, XLB declined 43.99% and the fund's annual expense ratio is 0.21%.

Technology Select Sector SPDR (NYSEArca: XLK - News)

With a 21.51% weighting, technology stocks are the largest industry sector represented within the S&P 500. XLK owns 80 leading technology stocks like Apple, IBM, Oracle, Microsoft, Yahoo and others. Technology is a diverse sector which covers IT consulting services, Internet companies, semiconductor equipment, software developers, computers and peripherals, telecommunication services and wireless products.

So far this year, XLK has gained 19.59% compared to a 41.39% loss in 2008. XLK's annual expense ratio is 0.21%.

Consumer Discretionary Select Sector SPDR (NYSEArca: XLY - News)

Unlike the defensive consumer staples sector (NYSEArca: XLP - News), consumer discretionary stocks are more prone to wild swings and downturns because of their heavy reliance on consumer spending. Despite a severe reduction in consumer's spending habits, XLY is surprisingly one of this year's best performing industry sectors. XLY includes industries such as automobiles and components, consumer durables, apparel, hotels, restaurants, leisure, media, and retailers. Stocks among XLY's portfolio are McDonald's, Walt Disney Co., and Comcast.

XLY has jumped 11.88% on the year compared to a 33.43% loss in 2008. XLY's annual expense ratio is 0.21%.

Making the Right Sector Choices

Investors need to be very selective about which industry sectors they decide to own. During the dotcom bust from 2000 to 2002 finding areas of sector strength were easier to identify because avoiding technology stocks was all you had to do. In today's environment it's more difficult because the global economic recession is affecting all industries.

Recently, a traditional sector rotation strategy of overweighting strong performing sectors and underweighting weaker ones has had limited success. Last year, for example, all nine S&P 500 industry sectors were down between 30% to 60%.

Conclusion

How can you know which sector ETFs are represent the best opportunity for capital growth? Which of the 300 industry focused ETFs are poised for the next leg up? Consider just one series of recent moves we made inside our Sector Savvy ETF Portfolio.

Just as stocks were bottoming, on March 2nd we got rid of short ETFs like ProShares UltraShort Real Estate (NYSEArca: SRS - News) and ProShares UltraShort Financial (NYSEArca: SKF - News). A few days later, on March 6th, the Dow Jones Industrial Average and S&P 500 bottomed.

And here's what we stated to our subscribers on March 2nd: 'In a contrarian move, we are establishing a long position in the ProShares Ultra Financials (NYSEArca: UYG - News). For the first time ever, UYG is trading below $2 per share compared to $72 in June 2007.' We subsequently bought UYG at $1.96 on March 2nd and sold half the position at $4.63 on May 8th. That works out to a 134% gain! Since the beginning of the year, the Sector Savvy ETF Portfolio is ahead 14.08% compared to a 4.08% rise in the S&P 500.

Getting the right mix of ETFs inside your portfolio doesn't happen by accident. Despite the unpredictable nature of stocks, with just a little guidance and research from the right sources you can achieve investment results that exceed your expectations. Four of our six subscription based ETF portfolios are outperforming the S&P 500 this year. This is ample proof that profitable results are possible even during difficult times.

*Performance through 6/5/09 market close

Problems of old Chrysler linger at new Chrysler

DETROIT (AP) -- Chrysler was reborn Wednesday under a new Italian parent, but it can't shake the shadows of its past: It's not selling enough cars, its fleet is tilted to trucks and SUVs, and help is more than a year away.

A 42-day stay in bankruptcy court cleansed the company of much of its debt and labor costs, but many analysts say Chrysler's immediate future is bleak. It lost $8 billion in 2008, and sales are down by almost half for the first five months of this year.

Cars designed by its new owner, Italy's Fiat Group SpA, won't make it to the U.S. until late 2010. And even then there are no guarantees American drivers will want the tiny cars Fiat specializes in.

In the meantime, Chrysler is left with few new vehicles headed to its drastically reduced network of dealers. Its aging model lineup is still heavy with bigger vehicles. And its offerings in the growing small and midsize markets haven't caught on.

"The showroom is not going to look terribly different over the next 18 months," said Aaron Bragman, an analyst for the consulting firm IHS Global Insight. "They're going to try and maintain market share in a down market with products, many of which haven't been redesigned in several years."

Bragman said Chrysler faces tremendous competition, especially from new cars in the works at General Motors Corp. and Ford Motor Co.

Even if the new Chrysler Group LLC can survive, the super-small Fiat cars that were popular in Europe, like the 500 and Grand Punto, could be out of step with Americans who like bigger cars and are used to lower gas prices.

During Fiat's last run at the U.S. market, in the 1970s and '80s, reliability problems led people to suggest the name stood for "fix it again, Tony."

"Fiat is really not a known commodity in the U.S. market," said David Koehler, a clinical marketing professor at the University of Illinois at Chicago. "It doesn't resonate with the target market."

The new Chrysler began operations Wednesday morning after the U.S. Supreme Court refused to hear an appeal of lower court decisions that allowed the transfer of most of the old Chrysler's assets to Fiat.

Fiat CEO Sergio Marchionne was named chief executive of the new company, and Chrysler CEO Bob Nardelli said farewell to employees and ended his tumultuous 20-month reign.

Marchionne quickly shook up the management, replacing Chrysler's chiefs of marketing, finance and product development and cutting layers to make the company more focused on individual brands, such as Jeep, Chrysler and Dodge.

Jim Press, who was Toyota Motor Corp.'s top U.S. executive until he joined Chrysler in 2007, was named deputy CEO and will probably run the company when Marchionne is in Italy.

In an e-mail to Chrysler's 54,000 workers, Marchionne acknowledged the company's problems and said he was determined to repair them. Five years ago, he wrote, he stepped into a similar situation at Fiat, perceived at the time as a failing bureaucracy that made poor cars.

"Through hard work and tough choices, we have remade Fiat into a profitable company that produces some of the most popular, reliable and environmentally friendly cars in the world," he wrote. "We can and will accomplish the same results here."

Marchionne's more immediate problem is weak offerings in the market for small and midsize cars. Its smallest vehicles, the Dodge Caliber and Jeep Compass and Patriot, sell far less than the Toyota Corolla, the nation's top-selling small car.

Work is already under way to convert Chrysler factories to produce small Italian-designed cars. Neither Chrysler nor Fiat would say which models would come first or how many would be imported to the U.S.

"The need is now, but unfortunately, it'll be at least a two- to three-year process," said Michael Robinet, vice president of CSM Worldwide, a Detroit-area auto industry consulting firm.

Chrysler plans to roll out new versions of its popular Jeep Grand Cherokee SUV and Chrysler 300 large sedan by the end of next year, along with a rechargeable electric vehicle. But Bragman said those were probably delayed in the bankruptcy process, making the next 18 months look iffy.

The good news for Chrysler is that it has cut its expenses enough that it can break even with lower sales, said Gary Dilts, senior vice president of global automotive operations for J.D. Power and Associates.

He said much of the drop in sales this year for Chrysler came from cuts in its sales to rental car companies. Chrysler actually made small gains in market share in sales to individuals in the first five months of 2009.

The struggling company has offered the heftiest rebates and other incentives to buyers recently. But it remains to be seen whether Chrysler can produce amazing cars, not just amazing deals.

The U.S. government has committed roughly $8 billion more to help Chrysler as it leaves Chapter 11 bankruptcy protection, and the Obama administration acknowledges Chrysler will probably lose money until Fiat rides to the rescue. But the government believes the company will be viable in the long term because of Fiat's management expertise.

Aside from the electric vehicle, Chrysler's upcoming new models are not particularly fuel-efficient, and they could suffer if gas prices keep climbing. Those same gas prices could help Chrysler benefit from Fiat's small-car technology.

Marchionne has said Fiat could start selling a successful, North America-made remake of the 500 minicar as soon as next year. Fiat also plans to relaunch the sporty Alfa Romeo brand in North America.

The new Alfa 149 midsize five-door hatchback, to be unveiled next year, would be built in North America as a successor to the larger Alfa 159, Marchionne has said.

But Toyota and Honda remain the champs of midsize cars, and Fiat still has to prove itself to American drivers.

"A lot of us have residual memories of Fiat that are less than stellar," Dilts said. "But I think the product looks good. They've got some great small engine capabilities. With a little bit of pressure on gasoline, I think they're going to give Fiat a look."

The Top 10 Housing Markets for the Next 10 Years

With home prices at the national level down a painful 32 percent from their 2006 peaks, it's easy to overlook real estate's benefits as a long-term investment. But the truth is, despite the ongoing housing bust, the overwhelming majority of America's real estate markets will appreciate over the next 10 years--although some more handsomely than others. "In the long run--subtracting from the ups and downs of the business cycle--house prices should grow at the rate of household income," says Mark Zandi, chief economist at Moody's Economy.com. "If people's incomes are rising, then they will buy more housing and house prices will rise." Income growth, in turn, is linked to the strength of the area's economy. Moody's Economy.com sifted through employment and population data and analyzed geographic and industry trends to generate 10-year home price projections for each of the nation's 384 distinct metropolitan statistical areas--everywhere from Abilene, Texas, to Yuma, Ariz. Using these data, U.S. News compiled a list of the top 10 housing markets for the next 10 years.

[See photos of the 10 Best Affordable Places to Retire.]

The neighboring cities of Bremerton and Silverdale, Wash., are located on the Kitsap Peninsula, a slip of land surrounded by more than 300 miles of coastline in lovely Puget Sound. Although the Pacific Northwest greenery is enticing, it's the cities' stable economies that should drive home price gains in the coming years. A large military presence--of the U.S. Navy in particular--helps insulate the local economies from volatility. Meanwhile, the nearby cities of Tacoma, Wash., and Seattle provide additional employment to the area's roughly 240,000 residents. "About a third of the community works [in either Tacoma or Seattle]," says Silvia Klatman, executive director of the Bremerton Area Chamber of Commerce. "And a little bit more than that actually work...for the military." Silverdale's 2008 median home sale price was $266,500. Moody's Economy.com expects home prices in the Bremerton/Silverdale area to increase by an average of 5.2 percent annually from the fourth quarter of 2008 through the same period of 2018.

At the foot of the Adirondack Mountains of New York you'll find Glens Falls. With attractions like beautiful Lake George just a short drive away, tourism has long played a key role in the local economy. But the area, which has about 130,000 residents, is also considered "the catheter valley" on account of its thriving medical device manufacturing industry. Companies like Covidien, AngioDynamics, and C. R. Bard have outposts in the area, which has also become a popular lower-cost alternative to nearby Saratoga County, N.Y., and a bedroom community for the state capital of Albany. In recent years, downtown Glens Falls has attracted an impressive amount of private-sector investment, says Todd Shimkus, president and chief executive of the Adirondack Regional Chamber of Commerce. "It is staggering to see $65 million for a new wing of a hospital, $17 million for new library, $25 million for a downtown townhouse project, $4 million for a corporate headquarters for Barton Mines, $3.5 million for a theater downtown, [and] $500,000 for a downtown park," he says. The 2008 median home sale price was $185,000 for Warren County, where Glens Falls is located. Home prices in the area will increase an average of 4.7 percent a year over the next 10 years, Moody's Economy.com projects.

Not far from Colorado's breathtaking Rocky Mountain National Park are the neighboring cities of Fort Collins and Loveland. Thanks to university research, local support, and private investment, this area of roughly 300,000 residents is evolving into a leading center for traditional and renewable energy, says Brian Willms, the president and CEO of the Loveland Chamber of Commerce. "We have this fantastic wind corridor to produce wind energy, over 300 days of sunshine a year--so it's a great place for solar energy--and we have some of the most productive natural gas reserves in the country," he says. "And with all of the research and development taking place here, it's a perfect culmination for a new energy economy." Fort Collins's 2008 median home sale price was $212,000. Home prices in the Fort Collins/Loveland area should rise an average of 4.1 percent annually over the next 10 years, Moody's Economy.com projects.

[Check out The $8,000 First-Time Home Buyer Tax Credit Program Expands: 5 Things to Know.]

With about 48,000 residents, Corvallis is nestled in the natural splendor of Oregon. Since it is home to Oregon State University as well as numerous public agencies, about a third of the area's workers are employed by the government, says Mysty Rusk, the president of the Corvallis-Benton Chamber Coalition. At the same time, this intellectually curious university town has long possessed a creative, entrepreneurial spark. "We have the highest [number of] patents per capita in the United States," Rusk says. And although large companies like Hewlett Packard and Samaritan Health Services are among the area's leading private employers, the community doesn't forget about the little guy. The local chamber of commerce plays an active role in helping entrepreneurs turn their ideas into payrolls. "We have hundreds of little startups," Rusk says. Corvallis's 2008 median home sale price was $245,000. Area home prices should increase an average of 4 percent annually over the next 10 years, Moody's Economy.com projects.

If moose sightings are more your style, check out Anchorage, Alaska, where Moody's Economy.com projects that home prices will appreciate by an average of 3.8 percent a year over the next 10 years. The real estate market in the Duluth, Minn., area is expected to post similar gains of about 3.7 percent annually. Home prices near Sandusky, Ohio, are also expected to increase an average of 3.7 percent a year over the next 10 years. That's only slightly ahead of the Santa Fe, N.M., area's projected 3.6 percent annual gains. The revitalization of Pittsfield, Mass.'s, downtown district could help area home prices rise an average of 3.5 percent a year over the next 10 years. Meanwhile, Decatur, Ill.'s, development into a green energy hub should help its housing market post roughly 3.4 percent annual gains, according to Moody's Economy.com.

Here's the projected average annual percent change in home prices from the fourth quarter of 2008 to the fourth quarter of 2018:

1. Bremerton-Silverdale, Wash.: 5.22 percent

2. Glens Falls, N.Y: 4.71 percent

3. Fort Collins-Loveland, Colo.: 4.06 percent

4. Corvallis, Ore.: 3.95 percent

5. Anchorage, Alaska: 3.8 percent

6. Duluth, Minn.: 3.74 percent

7. Sandusky, Ohio: 3.66 percent

8. Santa Fe, N.M: 3.57 percent

9. Pittsfield, Mass.: 3.51 percent

10. Decatur, Ill.: 3.44 percent

The Human Capital Bubble

Charles Wheelan, Ph.D. The Naked Economis

I recently had dinner with some of my students who will be graduating in the coming weeks. To make conversation, I asked what they will all be doing next year. An uncomfortable silence settled over the table. No one ever did answer the question.

I suspect there are many such conversations going on around the country, as students pick up diplomas, take stock of their student debt, and wonder what the heck comes next.

This isn't just a bad job market - it's the popping of a "human capital bubble." Wall Street and its assorted reckless offshoots didn't just squander much of our capital; the financial industry also sucked up human talent for the better part of a decade that should have gone somewhere else. It's the human equivalent of those empty subdivisions in foreclosure that never should have been built.

That's what happens with bubbles. Resources -- including people -- are allocated poorly because the market sends faulty signals.

Too Many Investment Bankers

Several years ago I looked at the list of jobs for the graduating seniors in my old fraternity. These are really bright kids at an Ivy League school. At least half were going to consulting and investment banks. I remember thinking: "That's too many," which is an odd thought for someone who believes in labor markets.

But I had a similar thought around the same time when I saw new golf courses and developments springing up like weeds across southwestern Florida. The units were priced at $700,000 or $800,000, even though the land had no inherent scarcity value. The developments weren't on the ocean, or even near the ocean in some cases, meaning that there was nearly unlimited space to build more and more identical developments across Southwest Florida.

"Those prices don't make sense," I remember thinking. The land doesn't have much value, and the construction costs for stucco condominiums around a golf course are only a fraction of what's being charged.

Believe me, I didn't predict the crash; I'd be a much richer man if I had. If anything, I talked myself out of believing that there were problems afoot because I'm such a firm believer that the most beautiful thing about markets is their ability to allocate resources efficiently.

After all, the whole point of a market, whether it is real estate or labor, is that prices send meaningful signals. Graduates take jobs with high salaries because that is where their skills will be most productive. Developers build new units where prices are high because that is where there is the most demand relative to supply.

Signals Were Wrong

Here's our problem now, particularly for the new graduates: Those signals were wrong.

In fact, if you want a snapshot of the impact of what happens when a bubble sends inaccurate market signals, ask yourself this question: How many people do you know who became real estate agents over the past five years? In hindsight, does that make much sense?

In the case of the financial industry, salaries had become rock-star huge, both for new graduates and for Wall Street veterans. (In fact, I would venture that the "stars" in finance were making a lot more than most successful rock musicians.) When we were in the midst of it, people like me assumed that those salaries reflected real value for the economy -- that we'd found more efficient ways to allocate capital and reduce risk and that the people who'd come up with those innovations were being compensated for their innovation.

Now it turns out that Wall Street hadn't really built a better mouse trap. Much of what was going on was just reckless speculation with borrowed money -- more like tearing up the old mouse trap and selling it for scrap. At best, these complex financial products offered minimal improvements over what we already had; at worst, they squandered enormous sums of capital and devastated the financial system.

When smart young graduates were lured to Wall Street (and related jobs) by staggering starting salaries, they were making the same mistake as the Florida condominium developers. The problem was NOT greed; self-interest is and always will be at the heart of market behavior. The problem was that self-interest is a disaster when the market signals are wrong. It's like giving someone a bad map and then criticizing their driving when they show up in the wrong place.

Smart People, Bad Choices

With real estate, that means we now have empty subdivisions and millions of homes in foreclosure. In the labor market, the effects were more subtle but arguably more damaging: Smart people could have and should have been doing something else. The clever men and women who made a lot of money designing and trading credit default swaps could have been conducting research on alternative energy, teaching math, practicing medicine, or doing any number of other jobs that strengthen society, rather than making bad bets with borrowed money.

The human capital bubble will take time to unwind, just like all other aspects of the larger financial crisis. People followed the money into jobs for which there is now less demand. In my world, college students flocked into economics, not necessarily because they were scintillated by its ability to predict human behavior and make the world a better place but because it was perceived as the best route to Wall Street.

But in the long run there is good news, too, though it may not be much immediate solace to the college graduates who are now moving in with their parents.

First, a tough job market will lead to a healthier job search for young people. Nothing focuses the mind like struggling to find a job rather than having one handed to you. I watch students participate in "corporate recruiting," which is the process in which firms come to campus and make it enticingly easy to take a lucrative job. It's a stunning opportunity for smart young people who know what they want to do; it can be a sad trap for those swept along by what everyone else is doing.

Twenty years ago I opted not to participate in corporate recruiting. After graduation, my friends had jobs; I was broke, unemployed, and unhappy. It was an awful stretch, but it also forced me to think hard about what I really wanted to do and then go out and find it. (I wanted to be a writer.)

Second, the post-Wall Street collapse job market will be healthier in the long run for the economy, as smart people do other things. It's the human equivalent of NOT building unneeded condominium developments.

The economic tragedy is that some of our smartest graduates took the big salaries on Wall Street (and in law firms doing Wall Street work and so on). Those folks could have made significant contributions somewhere else. That problem is now fixing itself.

How Much Should You Invest in Stocks?

Despite the recent gains on Wall Street, stock market values, as measured by the broad Wilshire 5000 index, remain nearly 40 percent below their October 2007 peak. For retirees hurt by those losses, getting back on the investing horse may be very hard. Many experts say stocks should still be a major component in most retirement portfolios, which should be adjusted as investors approach and move into retirement. This shifting mix of equities, bonds, and other holdings is known as the retirement "glide path." Here's some advice to help you determine the best glide path for you.

[Also see: Should You Manage Your Own Portfolio?]

There is no right answer. Financial advisers traditionally recommended that investors subtract their age from 100 and use the answer as the percentage that stocks should represent in their retirement portfolio. So, a 60-year-old would be 40 percent invested in stocks, a 70-year-old would have 30 percent, and so on. John C. Bogle, founder of the Vanguard Group, holds this view, and, having turned 80 last month, he was a lot better off in 2008 than the holder of a typical Vanguard retirement fund. Because of increases in life expectancies, the prevailing advice from money managers is that portfolios should be more heavily weighted toward stocks, even for people in their 70s and 80s.

Today, with stocks slowly moving up from bear-market levels, these fund managers say, going light on equities in a portfolio is a sure way to miss expected gains from a recovery. After last year's market declines, T. Rowe Price revisited its retirement fund assumptions and came away with a renewed support for the role of equities in a portfolio. "The study reaffirms that adequate exposure to equities has been the best way to meet the financial challenges posed by a potentially long retirement," the firm said in a recent newsletter. Charles Schwab, on the other hand, recently reduced the equity weightings in its retirement funds and wrote in a press release that its account holders supported the move toward more conservative investment practices.

Understand your current glide path. Determine how much of your portfolio is invested in stocks, and check once every three months. Here are some benchmarks: Fidelity Investments, which manages more than 17,500 employer retirement plans with 11.3 million investors, found that during the first quarter of this year, nearly 70 percent of the new money coming into these plans was flowing into stocks. That's down from 75 percent from the first quarter of 2007. Looking at the different age brackets of participants, here are the first-quarter breakdowns of equities in Fidelity portfolios: 77 percent for those ages 25 to 29, 76 percent for ages 35 to 39, 70 percent for ages 45 to 49, 59 percent for ages 55 to 59, and 53 percent for ages 60 to 64.

Look at how the professionals do it. The major retirement-fund companies have rosters of target-date funds that are designed to automatically shift glide paths as investors age. The funds were developed as default choices inside employee retirement plans. Investors just pick their planned retirement year, and the fund does the rest. However, target-date funds came under fire after they suffered steep market losses in 2008, as funds designed for 2010 retirees lost 25 percent of their value. Most target-date funds, however, have not shifted their equity mixes and continue to gain traction inside retirement plans.

Vanguard offers a useful Web tool that illustrates the changing glide path of its individual target-date funds as well as current performance information. John Ameriks, head of Vanguard's investment counseling and research group, says the funds performed as advertised last year. "Older investors who owned these funds were better protected than younger investors," he says, adding that beyond the equity mix, diversification in the types of investment holdings also provided a cushion. "But it wasn't magic. Some people expect it to protect them from losses, but it doesn't do that. The problem here is really the markets; it's not target-date funds. Unfortunately, people have lost money, and people are not happy about that."

Jonathan Shelon is the portfolio manager for Fidelity's family of target-date funds, known as Freedom Funds. The 2050 fund is 90 percent invested in equities, he notes, and the percentage decreases in each successive five-year period. The 2010 fund, for example, is 50 percent invested in equities. Shelon says that all of the funds are designed to roll over into an income fund 15 years after the target date is reached and that the income fund holds only 20 percent of its assets in equities. Even including the bear market, he notes, Fidelity's 2010 fund has averaged 5 percent annual gains in its 12-year history, and that's precisely what it was designed to do.

[Also see 4 Myths About Target-Date Funds.]

Implement your shifts in stages. As with portfolio rebalancing, any major change in your holdings--in mutual funds as well as individual stocks--should be made in stages. By spacing out your trades, you'll guard against the risk that you would be buying or selling equities at a bad point in a market cycle. And if you're not comfortable with the equity weighting in the target-date fund aligned with your retirement plans, you can easily shift into another target-date fund that better matches your personal risk profile.

Act. "The average 401(k) investor is not as engaged as we would like them to be," says Michael Doshier, Fidelity's vice president for workplace investing. He notes that only 1 in 7 Fidelity plan participants rebalances a portfolio in any given year. The bottom line: Many people are more likely to tune up their cars than their retirement portfolios. Don't be one of them.

What You Need to Know About the May Jobs Report

A flurry of conditionals has couched their "flickers of hope" and "green shoots," but government officials may finally have their chance to speak with unobscured optimism. The Labor Department reported Friday that employers cut 345,000 jobs from their payrolls last month, a bad sign in nearly any economy but this one, where average job losses have been twice that for the past six months. The losses reported are a full third less than economists had expected. Even job losses for the past two months were revised down by a total of 82,000 jobs. The unemployment rate, meanwhile, skipped higher to hit 9.4 percent for the month.

Tell me the bad news first. May brought yet another wave of steep job losses in the manufacturing sector. There were 30,000 jobs lost in the motor vehicles and parts industry alone. That industry has now seen employment drop by half since its peak in 2000.

The average workweek is still on the decline, suggesting that cost-cutting employers may have slowed their job shedding but continued to slash their employees' hours. Indeed, more than half of employers surveyed last month by outplacement firm Challenger, Gray & Christmas reported using cost-containment strategies such as cutting salaries and wages, while a smaller percentage were cutting staff.

What were the best parts? There were many bright spots in the report. Job losses moderated considerably in construction, retail, and professional and business services. Payroll cuts in temporary help services dropped about 90 percent from their six-month average--many economists view temp services employment as a leading indicator of the direction of the economy. Even in leisure and hospitality the news was good, as employment stayed flat for the month, after averaging 39,000 job cuts a month for the past six months.

Why did the unemployment rate rise to 9.4 percent? There's no question the job market continues to be fairly dismal. The good news is not that employers are adding jobs but that they're cutting them less vigorously. The number of unemployed workers has jumped by 7 million since the start of the recession in December 2007, and there are nearly 4 million workers who have been unemployed for 27 weeks or more.

However, a significant part of the reason for the sizable increase in the unemployment rate is the rising number of Americans who are identifying themselves as active job seekers and members of the labor force--both employed and unemployed. In fact, the labor force grew by 350,000 last month, and the labor force participation rate (the percentage of working-age Americans who are working or looking for work) is increasing.

What can we expect in the future? Job losses will likely continue to moderate, although most economists expect the unemployment rate will peak above 10 percent sometime later in the year. Employment will probably not bounce back in all sectors--or all states--evenly. According to IHS Global Insight, states such as Texas, Oklahoma, and Utah will be the quickest to recover, while Rust Belt states of Michigan, Ohio, and Indiana may take years to bounce back.

What are the experts saying?

"Despite what is a moderating pace of layoffs, there are telling signs that those currently unemployed are having, and will continue to have, increasing difficulty finding work. The mean duration of unemployment rose to 22.5 weeks, while the median duration rose to 14.9 weeks. Moreover, as of May, 52.9 percent of the unemployed are so because they have lost their jobs permanently (see second chart below), the highest figure in the life of the data. This is one sign that the current recession has generated a considerable degree of structural, as opposed to cyclical, unemployment, reflecting the amount of excess capacity that had developed in the economy over recent years. Even as the economy recovers, these displaced workers will likely be unemployed for a prolonged period." --Richard Moody, chief economist at Forward Capital

"The labor force has now jumped by more than 1 million over just the past two months, with the participation rate (the proportion of the population that is part of the labor force) increasing from 65.5 percent to 65.9 percent. This sort of rise in the participation rate is very unusual at this stage of the economic cycle -- usually, an increasing number of individuals become discouraged when employment prospects are bleak and they drop out of the labor force. We suspect that the recent rise in the labor force reflects statistical noise that will be reversed in coming months. .... A pullback in the labor force should help to temper further increase in the unemployment rate. Thus, we still look for a peak unemployment rate of about 10 percent later this year." --Ted Wieseman and David Greenlaw of Morgan Stanley Research

"While the improvement in the May payroll performance seems to have been at least partly skewed by an overly generous "birth-death adjustment" (which accounted for a full two-thirds of the unadjusted rise in private payrolls in the month), it is nonetheless clear that payroll declines are on a moderating path. However, the reported payroll change for May is considerably smaller than signaled by other labor market indicators, which is probably at least in part due to the birth-death adjustment. ... We continue to believe that we are still some time from stabilization in employment conditions, and even further from sustained growth in payrolls." -- Joshua Shapiro, chief U.S. economist at MFR

Chrysler poised to close sale, exit Chapter 11

NEW YORK (AP) -- Chrysler was a step closer to emerging from bankruptcy protection Wednesday, a day after opponents of the automaker's planned partnership with Italy's Fiat exhausted their appeals in an effort to halt the Obama administration-backed sale.

Late on Tuesday, the Supreme Court cleared the way for the sale of the bulk of Chrysler LLC's assets to Fiat Group SpA, rejecting an appeal by a trio of Indiana pension and construction funds, consumer groups and others to block the transaction.

The deal will likely close early Wednesday, according to a person briefed on the company's plans who declined to be named ahead of an official announcement by the automaker. Chrysler released a statement late Tuesday saying it expects the sale to close "very shortly."

The high court's action came on the heels of statements by Chrysler and Fiat that their deal would automatically expire if the sale didn't close by June 15 and a White House warning that there was no guarantee a new agreement could be brokered in time to save Chrysler from liquidation.

The sale of Auburn Hills, Mich.-based Chrysler's assets to Fiat had been expected to close more than a week ago, but Supreme Court Justice Ruth Bader Ginsburg decided Monday to delay the sale while studying the appeals.

A federal appeals court in New York had earlier approved the sale, but gave opponents until Monday afternoon to try to get the Supreme Court to intervene. The Indiana funds, which hold less than 1 percent of Chrysler's secured debt, claimed the sale unfairly favors Chrysler's unsecured stakeholders such as the union ahead of secured debtholders like themselves.

Justice Ginsburg ordered a temporary delay just before a 4 p.m. deadline on Monday. Chrysler, Fiat and the Obama administration warned that the high court's intervention could scuttle the sale.

Early Tuesday, the pension plans seized on comments from Fiat officials that they would not walk away from the deal even if June 15 were to pass without completing the sale. The plans tried to persuade the justices that there was no reason to rush to meet that deadline. But Chrysler, Fiat and the Obama administration stressed in response that Chrysler was losing $100 million every day its plants remain closed and that the deal would automatically terminate in less than a week, with no guarantee that a new agreement would be reached.

If the closing is delayed by more than 10 days, the government will need to "either to increase its overall funding to the detriment of taxpayers, or abandon its role in the transaction," the administration said.

Late Tuesday, the Supreme Court turned down the opponents' last-ditch bid. The court issued a brief, unsigned opinion explaining its action. To obtain a delay, or stay, someone must show that at least four of the nine justices find that the issue raised is serious enough to warrant hearing a full appeal and that a majority of the court will conclude the lower court decision was wrong.

"The applicants have not carried that burden," the court said.

The court did not consider the merits of the opponents' arguments, only whether to hear their full-blown appeal.

Indiana Treasurer Richard Mourdock expressed disappointment with the decision and said options seem limited for opponents of the sale.

"Obviously the supreme court of the land is the supreme court of the land," Mourdock said. "The United States government has, I continue to believe, acted egregiously by taking away the traditional rights held by secured creditors."

"The Chrysler-Fiat alliance can now go forward, allowing Chrysler to re-emerge as a competitive and viable automaker," the White House said in a statement applauding the decision.

Chrysler has passed swiftly through about five weeks of bankruptcy proceedings, partially as a result of the involvement of the Obama administration's auto task force, which provided billions in financing and helped negotiate a deal with the company's stakeholders.

Also Tuesday, a bankruptcy judge approved Chrysler's plan to terminate 789 of its dealer franchises.

U.S. Judge Arthur Gonzalez's order says the franchises, which represent about 25 percent of the company's dealer base, can no longer act as authorized Chrysler, Dodge and Jeep dealers, effective immediately. A written ruling explaining the decision was expected to be filed later.

Earlier in the day, more than 25 attorneys representing hundreds of dealers from across the country argued in court that little would be gained by terminating the franchises, while Chrysler maintained that the move is a necessary part of its plan to cut costs and quickly emerge from Chapter 11.

Many of the dealers were trying to sell the last cars on their lots and preparing to shut their doors for good at the end of the day, while others planned to sell used cars or other brands after severing ties with Chrysler.

At Tuesday's hearing, Chrysler attorneys also said the automaker would extend until Monday its program to help the affected dealers send any unsold vehicles to other dealers.

Under the agreement brokered in the days leading up to Chrysler's April 30 Chapter 11 filing, Fiat will receive up to a 35 percent stake in the automaker, in exchange for sharing the technology Chrysler needs to create smaller, more fuel-efficient vehicles.

The United Auto Workers union will get a 55 percent stake that will be used to fund its retiree health care obligations, while the U.S. and Canadian governments will receive a combined 10 percent stake.

Meanwhile, the automaker's secured debtholders would get $2 billion in cash, or about 29 cents on the dollar, for their combined $6.9 billion in debt. Some of the debtholders balked at the deal, saying as secured lenders they deserved more. The Indiana funds involved in the Supreme Court appeal hold about $42.5 million of Chrysler's $6.9 billion in secured debt. They bought it in 2008 for 43 cents on the dollar.

The funds have also challenged the constitutionality of the Treasury Department's use of money from the Troubled Asset Relief Program to supply Chrysler's bankruptcy protection financing. They say the government did so without congressional authority.

Consumer groups and individuals with product-related lawsuits also contested a condition of the Chrysler sale that would release the company from product liability claims related to vehicles it sold before the asset sale to Fiat. Compensation for such claims would have to come from the parts of the company not being sold to Fiat. But those assets have limited value and it's unlikely there will be anything to pay out.

"The Chrysler and GM bankruptcy plans will take away the the public's right to hold these companies accountable for when their defective cars injure and kill people, which is the incentive that has forced such car companies to recall defective vehicles," said Joanne Doroshow, of the Center for Justice & Democracy, in a statement.

Congress continues to scrutinize the Obama administration's restructuring of Chrysler and GM. The Senate Banking Committee said it planned to call Ron Bloom, a senior adviser to the auto task force, and Edward Montgomery, who serves as the Obama administration's director of recovery for auto communities and workers, to a hearing Wednesday.

Associated Press writers Mark Sherman and Ken Thomas in Washington, Colleen Barry in Milan and Tom Krisher in Detroit contributed to this report.

Oil rises to near $71 in Asia, hitting 2009 high

SINGAPORE (AP) -- Oil prices closed in on $71 a barrel Wednesday in Asia, reaching a 2009 high, as investors poured money into the commodity as a hedge against a weakening U.S. dollar and inflation.

Benchmark crude for July delivery was up 70 cents at $70.71 a barrel by midday Singapore time in electronic trading on the New York Mercantile Exchange. On Tuesday, it jumped $1.92 to close at $70.01.

Oil has jumped more than 100 percent in three months as traders have cheered news showing the worst of a severe U.S. recession is likely over, and have brushed off data -- such as a 9.4 percent unemployment rate in May -- that suggest crude demand will remain weak.

"I wouldn't be surprised if we're testing $80 in a week or two," said Gerard Rigby, energy analyst with Fuel First Consulting in Sydney. "The momentum right now is too strong."

A weaker U.S. dollar and expectations massive fiscal stimulus spending could spark inflation have also bolstered prices. The euro was steady at $1.4073.

The Energy Department's Energy Information Administration said Tuesday that crude prices will likely average $67 a barrel in the second half of 2009, about $16 higher than the first six months of the year. A month ago, the EIA's price-per-barrel forecast for the second half of 2009 was $55.

The Energy Department also said global consumption of oil, which has fallen by nearly 2 million barrels per day this year, will begin to rebound in 2010 as the economy recovers.

Wednesday's release of petroleum inventory data from the EIA could provide additional insight about crude demand. Analysts expect a rise of 800,000 barrels.

In other Nymex trading, gasoline for July delivery rose 1.34 cents to $1.98 a gallon and heating oil gained 1.15 cents to $1.82. Natural gas for July delivery was up 6.8 cents at $3.80 per 1,000 cubic feet.

In London, Brent prices gained 53 cents to $70.15 a barrel on the ICE Futures exchange.

Obama calls for new beginning between US, Muslims

CAIRO – President Barack Obama called for a "new beginning between the United States and Muslims" Thursday and said together, they could confront violent extremism across the globe and advance the timeless search for peace in the Middle East.

"This cycle of suspicion and discord must end," Obama said in a widely anticipated speech in one of the world's largest Muslim countries, an address designed to reframe relations after the terrorists attacks of Sept. 11, 2001, and the U.S.-led war in Iraq.

In a gesture, Obama conceded at the beginning of his remarks that tension "has been fed by colonialism that denied rights and opportunities to many Muslims, and a Cold War in which Muslim-majority countries were often treated as proxies without regard to their own aspirations."

"And I consider it part of my responsibility as president of the United States to fight against negative stereotypes of Islam wherever they appear," he said.

At the same time, he said the same principle must apply in reverse. "Just as Muslims do not fit a crude stereotype, America is not the crude stereotype of a self-interested empire."

Obama spoke at Cairo University after meeting with Egyptian President Hosni Mubarak on the second stop of a four-nation trip to the Middle East and Europe.

The speech was the centerpiece of his journey, and while its tone was striking, the president also covered the Middle East peace process, Iran, the wars in Afghanistan and Iraq and the violence struggle waged by al-Qaida.

Obama arrived in the Middle East on Wednesday, greeted by a new and threatening message from al-Qaida's leader, Osama bin Laden. In an audio recording, the terrorist leader said the president inflamed the Muslim world by ordering Pakistan to crack down on militants in Swat Valley and block Islamic law there.

But the president said the actions of violent extremist Muslims are "irreconcilable with the rights of human beings," and quoted the Quran to make his point.

"Islam is not part of the problem in combatting violent extremism — it is an important part of promoting peace," he said.

The White House said Obama's speech contained no new policy proposals on the Middle East, and he issued an evenhanded call to Israel and Palestinians alike to live up to their international obligations.

"Hamas must put an end to violence, recognize past agreements, and recognize Israel's right to exist," he said of the organization the United States deems as terrorists.

"The Palestinian Authority must develop its capacity to govern, with institutions that serve the needs of its people," Obama said.

"At the same time, Israelis must acknowledge that just as Israel's right to exist cannot be denied, neither can Palestine. The United States does not accept the legitimacy of continued Israeli settlements" on the West Bank and outskirts of Jerusalem, he said. "It is time for these settlements to stop."

As for Jerusalem itself, he said it should be a "secure and lasting home for Jews and Christians and Muslims ..."

Obama also said the Arab nations should no longer use the conflict with Israel to distract its own people from other problems.

He treaded lightly on one issue that President George W. Bush had made a centerpiece of his second term — the spread of democracy.

Obama said he has a commitment to governments "that reflect the will of the people." And yet, he said, "No system of government can or should be imposed upon one nation by any other."

At times, there was an echo of Obama's campaign mantra of change in his remarks, and he said many are afraid it cannot occur.

"There is so much fear, so much mistrust. But if we choose to be bound by the past, we will never move forward," he said.

The president's brief stay in Cairo included a visit to the Sultan Hassan mosque, a 600-year-old center of Islamic worship and study. A tour of the Great Pyramids of Giza was also on his itinerary.

The build-up to the speech was enormous, stoked by the White House although Obama seemed at pains to minimize hopes for immediate consequences.

"One speech is not going to solve all the problems in the Middle East," he told a French interviewer. "Expectations should be somewhat modest."

Eager to spread the president's message as widely as possible, the tech-savvy White House orchestrated a live Webcast of the speech on the White House site; remarks translated into 13 languages; a special State Department site where users could sign up for speech highlights; and distribution of excerpts to social networking giants MySpace, Twitter and Facebook.

Though the speech was co-sponsored by al-Azhar University, which has taught science and Quranic scripture here for nearly a millennium, the actual venue was the more modern and secular Cairo University. The lectern was set up in the domed main auditorium on a stage dominated by a picture of Mubarak.

Human rights advocates found that symbolism troubling: an American president watched over by an aging autocrat who's ruled Egypt since 1981.

"Egypt's democrats cannot help being concerned," wrote Dina Guirguis, executive director of Voices for a Democratic Egypt.

The university's alumni are among the Arab world's most famous — and notorious. They include the late Palestinian leader Yasser Arafat and Nobel Prize-winning author Naguib Mahfuz. Saddam Hussein studied law in the '60s but did not graduate. And al-Qaida second-in-command Ayman al-Zawahri earned a medical degree.

Work Visa Bill Threatens Indian Outsourcers

A new bill in Washington aimed at tightening the rules for companies in the U.S. that hire skilled workers from abroad could threaten the business model for outsourcing firms such as Wipro Technologies (NYSE:WIT - News), Infosys Technologies (NasdaqGS:INFY - News), and Tata Consultancy Services (TCS.BO). Top executives at those firms say the legislation could also escalate into a trade dispute between India and the U.S.

The bill, introduced by Senators Dick Durbin (D-Ill.) and Charles Grassley (R-Iowa), would change many of the rules companies must follow to obtain temporary work visas, known as H-1Bs and L-1s. The most controversial new rule would bar companies with more than 50 U.S. employees from getting any additional work visas if more than 50% of their U.S. workforce is made up of H-1B or L-1 visa holders.

The 50/50 Rule

Grassley says the "50/50" provision would help protect American jobs at a time of rising unemployment. "The original rationale (for the visa program) was that we needed to allow importation of managers and technical people when there weren't enough Americans available," he said in an interview. "It seems to me ridiculous that companies now have more than half of their workers on (these visas) when there are certainly a lot of workers in the U.S. who can fill in some of those positions."

Som Mittal, president of the NASSCOM trade group that represents India's software and services companies, says the Durbin-Grassley bill has some valuable elements, including tougher oversight to prevent visa fraud. But he says the 50/50 provision is misguided and dangerous. If enacted, the legislation would stop virtually all of the major Indian outsourcing firms from bringing new employees into the U.S., jeopardizing their work for American clients. "Both U.S. and Indian industry would suffer," says Mittal. "A lot of disruption would happen."

Azim Premji, executive chairman of Wipro, says the Indian government is likely to take action if the legislation passes in its current form. The technology-services sector is critical to India's economy, with software and services together accounting for about a quarter of the country's exports. "There is no way our government can take it lightly," says Premji. "It's a vital piece of the economy." NASSCOM and its member companies are also making their case to American lawmakers and the Obama Administration.

The Indian Outsourcing Model

The work visa program was established nearly 20 years ago to allow U.S. companies to bring workers with rare skills into the country. Among the most active participants are Microsoft (NasdaqGS:MSFT - News) and IBM (NYSE:IBM - News), as well as Wipro, Infosys, and Tata. But American tech companies tend to use work visas differently than Indian outsourcers. While companies like Microsoft and Google (NasdaqGS:GOOG - News) often use the temporary visas as a stepping stone to permanent residency for talented workers, outsourcing firms typically post visa workers in the U.S. on a short-term basis, in many cases about 18 months. The workers then return to India, where they continue to work for the outsourcer on behalf of U.S. clients.

The outsourcing firms' business model, developed over the past decade, has worked well for them and their American clients. When they win contracts to manage the technology, accounting, or other operations for U.S. corporations, the Indian firms typically handle the work with about 20% to 30% of the employees in the U.S. and 70% to 80% offshore. The mix allows the companies to benefit from the lower wage rates offshore, while doing the most critical work, such as testing software applications, on-site. In the past several years, offshore outsourcing firms, particularly from India, have dominated the list of companies awarded H-1B visas.

Mittal says outsourcing firms and visa workers have helped American companies -- and by extension the U.S. economy. "They have added to the competitiveness of the U.S.," he says. "They are extremely important to U.S. companies seeking to lower costs."

But U.S. tech worker groups say this arrangement allows outsourcers to displace American workers both while the visa holders are in the U.S. and when they return home. They say the visas depress wages in the U.S. by increasing the supply of workers. An April 2009 report written by Prasanna Tambe of New York University's Stern School of Business and Lorin Hitt of the Wharton School at the University of Pennsylvania estimates that H-1B admissions at the current levels are associated with a 5% to 6% drop in wages for computer programmers and systems analysts over time. Durbin and Grassley say their legislation is aimed at halting the use of U.S. work visas to send jobs overseas and lower wages.

Options for Outsourcers

If the bill were to pass in its current form, outsourcing firms could change their practices in several ways to reduce the ratio of visa holders to total employees in the U.S. Options include hiring more American workers, creating more jobs overseas, acquiring other companies to dilute visa holder ratios, or some combination of these moves. Infosys CEO Kris Gopalakrishnan says that if the bill passes, his company will pursue a mixed strategy: "We will have to increase our recruitment in the U.S., and some work that's now done on-site will have to shift to offshore locations." Gopalakrishnan says that while the business model would change, he is confident that the bill wouldn't affect the company's financials in the long term.

Wipro's Premji says that passage of the bill would mean "transition periods during which business will suffer". Like Gopalakrishnan, his strategy would be a combination of more U.S. hiring with more hiring offshore. His company would likely reduce its onshore staff for U.S. work from 25% to between 10% and 12%. He says that in anticipation of visa law changes, Wipro has already started hiring more Americans at its centers in Atlanta and Troy, Mich. Other outsourcing firms may follow suit: An analyst report by UBS (NYSE:UBS - News) estimates that Cognizant Technology Solutions (NasdaqGS:CTSH - News) would need to hire 4,300 to 6,500 additional American employees to meet the legislation's requirement.

There is no guarantee that the Durbin-Grassley bill will become law. It is likely to be considered in Congress alongside proposals for comprehensive immigration reform. The bill would still need to pass the Senate and the House, and it could be modified along the way. However, its chances of passing likely will increase if the unemployment rate in the U.S. continues to rise. Executives at the outsourcing firms vow to fight the legislation and particularly the 50/50 provision, which they say is an unfair restriction of Indian companies' ability to compete in the U.S. "It certainly does surprise us that the U.S., being so capitalist, is now going in the opposite direction," says Natarajan Chandrashekaran, chief operating officer of Tata Consultancy. "We certainly have to be watchful."

Judge to consider Chrysler franchise terminations

NEW YORK – Chrysler heads back to bankruptcy court Thursday to ask the judge overseeing its case to allow it to terminate the franchise agreements of 789 of its dealers, despite the protests of many dealers who say the move could shutter their businesses for good.

U.S. Judge Arthur Gonzalez is expected to hear testimony from Chrysler LLC executives and dealers during what's expected to be a lengthy hearing. The proceedings start at 8 a.m. EDT.

Auburn Hills, Mich.-based Chrysler maintains that it needs to reduce its dealer base by about 25 percent to a leaner network of about 2,400 dealers in order to emerge from Chapter 11 bankruptcy protection as a stronger company.

But the dealers argue that they don't cost the automaker anything. They say that if Gonzalez approves Chrysler's motion it will result in the shuttering of hundreds of dealerships and thousands of workers will lose their jobs.

A group representing about 300 of the dealers slated to lose their franchises have filed an objection. They also earlier objected to Chrysler's motion to sell the bulk of its assets to a group led by Italy's Fiat Group SpA, because it was tied to the plan to eliminate the dealerships.

Thursday's hearing comes a day ahead of Chrysler's appearance in front of the U.S. Court of Appeals for the Second Circuit in New York.

Late Tuesday, that court halted Chrysler's sale of most of its assets to Fiat pending an appeal by a trio of Indiana state pension and construction funds. Arguments are scheduled for Friday afternoon.

"We are pleased the Court of Appeals has agreed to hear our arguments," Indiana Treasurer Richard Mourdock said in a statement. "As we have stated from the beginning, Indiana retirees and Indiana taxpayers have suffered losses because of unprecedented and illegal acts of the federal government."

Chrysler has maintained that the deal with Fiat is its only hope of avoiding selling itself off piece by piece. If the sale doesn't close by June 15, Fiat has the option of pulling out of the deal.

In addition, production at Chrysler's manufacturing plants remains halted pending the sale's closing.

"We are pleased that the Court of Appeals is setting this schedule and has recognized the sense of urgency Chrysler has to preserve and protect its going concern value," Chrysler said in a statement released Wednesday afternoon. "We look forward to an expeditious conclusion to this matter and to getting back to building vehicles."

The funds, which include the Indiana State Police Pension Fund, the Indiana Teacher's Retirement Fund, and the state's Major Moves Construction Fund, claim that the deal as structured unfairly favors the interests of Chrysler's unsecured stakeholders ahead of those of secured debtholders such as themselves.

They also challenged the constitutionality of the U.S. Treasury Department's use of Troubled Asset Relief Program, or TARP, funds to supply Chrysler's bankruptcy protection financing.

Late Sunday, U.S. Judge Arthur Gonzalez, the bankruptcy judge overseeing Chrysler's case, issued a ruling approving the sale following three marathon days of testimony and arguments. Gonzalez also ruled that the funds do not have the standing to challenge the use of TARP money because they will receive their fair share of the $2 billion set aside for secured debtholders, which is more than they would have received if Chrysler had liquidated.

Under the terms of the agreement, a United Auto Workers union retiree health care trust will receive a 55 percent stake in the new company, while Fiat will get a 20 percent stake that can increase to 35 percent. The remaining 10 percent of the company will be owned by the U.S. and Canadian governments.

In the days leading up to Chrysler's Chapter 11 filing, the automaker struck a deal with the majority of secured lenders to give them $2 billion in cash, or 29 cents on the dollar, to erase the $6.9 billion in debt. But some of the debtholders balked and the automaker was forced to file for bankruptcy protection on April 30.

The Indiana funds hold $42.5 million, or less than 1 percent, of Chrysler's total $6.9 billion in secured debt. They bought the debt in July 2008 for 43 cents on the dollar.