Markets drop as ECB disappoints

Markets drop as ECB disappoints

European Central Bank President Mario Draghi gave with one hand and took away with the other on Thursday, first cutting the central bank’s benchmark lending rate by 25 basis points and offering unlimited three-year loans to banks, then putting an end to speculation that the ECB would launch a bond-buying program.

TSX  11951.79 -1.62% -196.94

SP 500  1234.35 -2.11% -26.66

Dow  11997.70 -1.63% -198.67

Nasdaq  2596.38 -1.99% -52.83

Markets rallied on the interest rate cuts but dropped sharply when Draghi said statements he’d made last week, which led some to believe the central bank would buy more sovereign debt, had been misinterpreted.

The pessimism is coming from the fact that the ECB didn’t go any further on the possibility of buying debt Peter Jankovskis, a money manager at Oakbrook Investments in Lisle, Illinois, told Bloomberg.

They continue to do things to Band-Aid the banking sector, but they aren’t getting at the fundamental issue here, which is that some of these underlying countries are nearing insolvency.

European Union leaders gathered Thursday night in Brussels for what French President Nicolas Sarkozy characterized as a last-chance summit to find a way to resolve the region’s sovereign-debt crisis. European media are reporting that those at the summit are vowing not to leave until a deal is reached.
Canadas benchmark stock index fell as the price of crude oil dropped $2.15 US to US$98.34 a barrel, and gold declined US$31.40 to US$1,713.40 an ounce.

The SP/TSX composite index dropped 196.93 points, or 1.62%, to 11,951.79, with nine of its 10 sub-indexes declining, led by materials, down 2.47%. Telecommunications was the sole gainer; it edged up 0.01 points after BCE Inc. announced it was raising its dividend for 2012 by five per cent. BCE shares closed at $40.60, up 1.05%.

The Dow Jones industrial average fell 198.67 points, or 1.63%, to 11,997.70 as once again concern about the eurozone overshadowed good domestic news , in this case, a report Thursday from the U.S. Labor Department that showed initial jobless claims for the previous week came in below expectations, a sign that the country’s labour market may be stabilizing.

The Nasdaq composite fell 52.83 points, or 1.99%, to 2,596.38. Canada’s junior Venture exchange lost 21.83 points, or 1.42%, to close at 1,517.38.

The Canadian dollar dropped sharply, closing at 97.79 US cents, a loss of 1.19 cents.

“The realization gripped the market that it terms of liquidity, the central bank was there, but would do very little further in terms of funding or bond purchases that has weighed on risk assets as well as the Canadian dollar, Stewart Hall, senior currency strategist at Royal Bank of Canada in Toronto, told Bloomberg. The market is looking for some signs of a credible fence to cordon off the crisis, and it didn’t get a heck of a lot from the ECB.

Here’s the news investors were watching today:

Odds of another financial crisis on the rise: Bank of Canada

Full coverage of Europe’s crisis summit

National Bank posts higher profit, boosts dividend

BCE wows with triple whammy


European leaders meet in Brussels for a crisis summit. Join us Friday morning for live coverage



8:30 a.m.

  • Labor Productivity (Q3): Economists expect a decline of 0.3%
  • Merchandise trade balance (Oct): Economists expect $700-million, down from the month before


8:30 a.m.

  • Goods and services trade balance (Oct): Economists expect a deficit of US$44-billion, up from the month before

9:55 a.m.

  • University of Michigan Consumer Sentiment Index (Dec): Economists expect a reading of 65.8

With files from Financial Post staff

Continue reading: Markets drop as ECB disappoints

RIM leaders face the music at AGM


WATERLOO, ONT. As Research In Motion Ltd. wrapped up its annual general meeting here on Tuesday night and the 700 or so attendees filed out, the sounds of Bob Segers classic tune “Against the wind could be heard wafting over the speakers.

It was an apt music selection for Canada’s technology champion at a time when the company is facing one of its darkest hours and the strongest headwinds in its history.

On Tuesday, RIM revealed it plans to launch seven new BlackBerrys later this year including the previously announced BlackBerry Bold 9900 ” however, a much-anticipated changeover to a new operating system won’t happen until 2012.

Earlier in the evening, RIM’s co-chief executives and co-chairmen Jim Balsillie and Mike Lazaridis stood united behind a podium emblazoned with the BlackBerry maker’s logo as they faced questions and criticism from analysts and shareholders about the current trajectory of the Waterloo, Ont.-based company.

Shares of RIM are down nearly 60% over the past 12 months, as product delays and increased competition from rival devices from Apple Inc. and Google Inc. have eaten away at the BlackBerry’s dominant position in the smartphone market.

As a result, RIM’s top executives are facing mounting pressure from analysts and shareholders to restructure the leadership of the company, including the possibility of splitting the co-CEO and co-chairmen titles currently held by Mr. Lazaridis and Mr. Balsillie.

RIM is also facing pressure for its board to take on a more active role in the operations of the company, with some observers saying the company should appoint a chairman independent of Mr. Balsillie and Mr. Lazaridis to help ease a turnaround at RIM.

Making matters worse, on Tuesday, prominent Bay Street financial analyst Mike Abramsky issued a report suggesting RIM should be split in two if the company fails to successfully transition its BlackBerry smartphones to the QNX operating system that currently powers its PlayBook tablet device.

We are not perfect, but we give our very best every day, Mr. Balsillie said in response to a question from the audience on Tuesday night.

“We literally don’t take a day off.

Earlier this year, RIM was forced to cut its near-term profit outlook due to slumping BlackBerry sales caused by a series of product delays. On Tuesday, Mr. Lazaridis said RIM is on the verge of the largest product rollout in its history with seven BlackBerry devices expected to launch later this year, including the new BlackBerry Bold 9900 which is due out later this summer.

However, the Bold 9900 will run on the BlackBerry 7 operating system. Analysts say that in order for RIM to regain its footing as a dominant player in the smartphone market, it needs to begin producing BlackBerry smartphones running on the QNX operating system.

On Tuesday, RIM revealed that the first QNX-powered BlackBerrys will not launch until 2012, even though there was some previous speculation that the first BlackBerrys on the new operating system might arrive in stores later this year.

RIM said the first editions of the PlayBook tablet that are capable of accessing the Internet via a cellular connection will be available in September.

On June 30, RIM said it would create a committee to examine possible changes to its corporate structure, including the possibility of separating the chairman and CEO roles after Northwest and Ethical Investments threatened to put forth a motion to consider the changes at the AGM. As a result, NEI agrees to withdraw its proposal.

Eight of the nine members of RIM’s board of directors including Mr. Balsillie and Mr. Lazaridis were re-elected for another 12-month term …

Continue reading: RIM leaders face the music at AGM

Tax Holiday Rejected On Overseas Profits


The Obama administration on Wednesday rejected the idea of a tax holiday for U.S. multinationals overseas income, criticizing a plan being floated by some House Republicans and multinational companies for a stand-alone relief measure.

Treasury officials said they would only consider letting U.S. companies pay a reduced tax rate on as much as $1 trillion of profits earned overseas as part of a broader overhaul of the U.S. corporate tax code.

It would not be sensible to consider a repatriation holiday outside of that context, Assistant Secretary Michael Mundaca said in a statement published on Treasurys blog. Giving companies a temporary tax holiday on their foreign income could undercut the broader overhaul effort, Treasury officials worry. They’ve previously expressed concern about a stand-alone holiday

Backers of a tax holiday said they would keep trying. House Majority Leader Eric Cantor (R., Va.), who this week promoted the idea for a separate tax holiday, believes a broader overhaul will require a longer time and more leadership from the White House to pass, a spokeswoman said. In the meantime, [a tax holiday] is an option that can be considered immediately to spur the economy and jobs, spokeswoman Laena Fallon said.

Rep. Kevin Brady (R., Texas) is working on a repatriation bill and hopes to introduce it within a couple of weeks, a spokeswoman said Wednesday, after the Treasurys statement was posted.

The U.S. corporate tax rate, once among the world’s lowest, is now one of the highest with a top rate of 35%, though various tax breaks enable many companies to pay less than this. The U.S. also is one of the few large economies that seek to tax their companies overseas earnings.

Many U.S. companies have been parking increasingly large amounts of their overseas earnings offshore, where the money can avoid U.S. taxes until brought home. Some analysts believe that has damped investment in the U.S. and slowed job growth, at least to some degree.

More than a dozen multinationals, including Google Inc., Microsoft Corp., Cisco Systems Inc. and Pfizer Inc., recently began pushing for tax holiday legislation that would allow the money to come home at a low tax rate on a temporary basis. Congress passed a similar measure in 2004, and companies were temporarily taxed at a rate of 5.25% on the more than $300 billion in profits that were returned from offshore subsidiaries.

But some research suggests that while the holiday led companies to bring back more earnings to the U.S., the repatriations did not increase domestic investment or employment, according to a 2009 congressional report. Instead, much of the repatriations were returned to shareholders through stock repurchases. Supporters of repatriation disagree, saying many companies used some of the money for job creation and training.

Some analysts say giving companies another repatriation holiday would lead them to conclude they can win regular tax holidays in the future. That could diminish their support for a broader corporate-tax overhaul, including a permanent lowering of corporate tax rates and an easing of U.S. tax rules on overseas income. Because of these concerns, support for a separate repatriation bill doesn’t yet appear strong in the Senate.

Write to John D. McKinnon at…

Continue reading: Tax Holiday Rejected On Overseas Profits

Make or break time for the euro

Financial Post Staff Dec 8, 2011 – 11:18 AM ET| Last Updated: Dec 8, 2011 1:53 PM ET

All eyes will be on Europe Friday when leaders meet in their eighth crisis summit of the year to try to resolve the region’s crippling debt crisis and save the euro zone.

The sense of urgency from within Europe and without has never been greater.

Stay with us today as we bring you the latest developments and analysis leading up to this crucial summit, which begins Thursday night in Brussels.

First up Thursday was the European Central Bank’s decision to cut its benchmark rate by a quarter-point to 1%, and introduce fresh measures to ease the region’s credit squeeze.

Read the full story on the rate cut here: ECB cuts rates to record low

While the rate cut was widely expected, global markets had hoped ECB president Mario Draghi would aggressively ramp up its bond-buying program and allow the eurozone to lend money to IMF so it can help fight the eurozone debt crisis.

No such luck. Mr. Draghi offered Europe unlimited cash for three years and lowered collateral requirements, but he played down expectations the central bank would dramatically increase its debt crisis-fighting measures and revealed the vote to cut rates was not unanimous.

Read the full story here: ECB cool on more bond buying

The euro turned negative in response and Italian government bond yields rose. Find out more about the market’s reaction at Opening Bell

Lobbying for the summit started early Thursday at a meeting of European conservative party leaders in the French port city of Marseille.

French President Nicolas Sarkozy told leaders that they won’t get a second chance.

“Never has the risk of Europe exploding been so big, he said.

“The diagnosis is that the euro, which should inspire confidence, is not inspiring this confidence, the French leader said. “If there is no deal on Friday, there will be no second chance.

Meanwhile, European Commission Jose Manuel Barroso echoed the late U.S. President John F. Kennedy as he appealed to leaders top put aside sharp differences.

What I expect from all heads of governments is that they don”t come saying what they cannot do but what they will do for Europe. All the world is watching us and what the world expects from us is not more national problems but European solutions.

Read the full story here: Cracks emerge ahead of ‘crucial’ summit

Europe’s leaders are not the only ones warning that the stakes are high.

A note from UBS economist Larry Hatheway on Wednesday spells out why he and his colleagues at the bank believe a eurozone collapse would result in of the world scenario. It makes for some grim reading. UBS advise for a euro collapse: ‘tinned goods, small caliber weapons

Today, the Bank of Canada in its Financial System Review left no doubt as to the gravity of the situation. The bank said risks to Canada’s financial stability rose sharply in the second half of the year largely because of the European sovereign debt crisis, even though domestic banks remain stronger than in most other countries.

Here’s their graph showing Europe as a red alert:

Read the story here: Bank of Canada signals red alert for Europe debt crisis

This news breaking now:

The International Monetary Fund will participate in efforts to provide a crisis response, IMF Managing Director Christine Lagarde says.


Investors are still not happy about European Central Bank President Mario Draghi saying remarks he made last week were misinterpreted and that the bank would not increase its …

Continue reading: Make or break time for the euro

McConnell: Real Deal Not Possible With Obama

McConnell: Real Deal Not Possible With Obama

WASHINGTON a real solution to U.S. fiscal problems isn’t possible as long as President Barack Obama remains in office, Senate Minority Leader Mitch McConnell said Tuesday, heightening the rhetoric surrounding the debt-ceiling debate.

Mr. McConnell, the Senates top Republican, and House Speaker John Boehner (R., Ohio), both blamed President Obama for the stalemate in the debt-ceiling and deficit-reduction talks and urged the White House to break the impasse. Negotiations were to resume for a third-straight day Tuesday at 3:45 p.m. EDT.

Associated Press

Senate Minority Leader Mitch McConnell of Kentucky during a May news conference in Washington.

Mr. McConnell said he had gone into negotiations in good faith over how to formulate a deficit-reduction package to accompany an increase in the statutory borrowing limit. The Treasury has said the limit must be raised by Aug. 2 to avoid the potential of a U.S. default on its debts, while Mr. Obama has said he wants a deal by July 22.

Messrs. McConnell and Boehner said it was the White Houses responsibility to ensure policy makers are able to meet the deadline.

This debt-limit increase is his problem, Mr. Boehner said after a morning meeting with Republican House members. The President talks a good game, but when it comes time to actually putting these issues on the table, making decisions, they cant quite pull the trigger.

Mr. McConnell said he concluded after the latest negotiations that the administration had expressed a fundamental unwillingness to agree to significant spending cuts.

But after years of discussions and months of negotiations, I have little question that as long as this president is in the Oval Office, a real solution is unattainable, Mr. McConnell said in a Senate floor speech.

Mr. Obama pressed congressional leaders Monday to forge a $4 trillion, 10-year deal during a contentious negotiating session at the White House.

Republicans are pressing instead for a more limited deal involving $2 trillion in spending cuts that include none of the tax increases the White House is seeking.

Mr. Obama sought to keep the pressure on his Republican counterparts Tuesday.

In an interview with CBS News, Mr. Obama said, I cannot guarantee that those checks go out on August 3rd if we haven’t resolved this issue. Because there may simply not be the money in the coffers to do it, Mr. Obama said in the CBS interview, according to excerpts released by the network.

We know we won’t have a lot of time, Treasury Secretary Timothy Geithner said Tuesday. We want to wrap up the broad outlines of an agreement by the end of this week, certainly by the end of next week so we have time to put the legislation in place.

Hitting the Ceiling

See what the federal debt limit has been at year-end since 1940.

Mr. McConnell did offer details of what he said was a plan to ensure the country doesn’t default on its debt if there is no wider agreement by Aug. 2.

The McConnell plan essence would put in place a procedure that could allow three separate increases in the country’s debt ceiling totaling $2.5 trillion through the end of 2012.

But his plan would require a bill to be passed in both the House and Senate in the next two weeks, something that likely faces long odds.

McConnell didn’t answer directly when he was asked whether he had run his proposal by Mr. Boehner, who would have to agree to bring the legislation to the House floor creating the procedure in place. He said only that he had spoken to people.…

Continue reading: McConnell: Real Deal Not Possible With Obama

Cyber attacks threaten global oil supply

Cyber attacks threaten global oil supply

By Daniel Fineren

DOHA – Hackers are bombarding the world’s computer controlled energy sector, conducting industrial espionage and threatening potential global havoc through oil supply disruption.

Oil company executives warned that attacks were becoming more frequent and more carefully planned.

“If anybody gets into the area where you can control opening and closing of valves, or release valves, you can imagine what happens,� said Ludolf Luehmann, an IT manager at Shell Europe’s biggest company .

“It will cost lives and it will cost production, it will cost money, cause fires and cause loss of containment, environmental damage – huge, huge damage,� he told the World Petroleum Congress in Doha.

Computers control nearly all the world’s energy production and distribution in systems that are increasingly vulnerable to cyber attacks that could put cutting-edge fuel production technology in rival company hands.

“We see an increasing number of attacks on our IT systems and information and there are various motivations behind it – criminal and commercial,� said Luehmann. “We see an increasing number of attacks with clear commercial interests, focusing on research and development, to gain the competitive advantage.�

He said the Stuxnet computer worm discovered in 2010, the first found that was specifically designed to subvert industrial systems, changed the world of international oil companies because it was the first visible attack to have a significant impact on process control.

But the determination and stamina shown by hackers when they attack industrial systems and companies has now stepped up a gear, and there has been a surge in multi-pronged attacks to break into specific operation systems within producers, he said.

“Cyber crime is a huge issue. It’s not restricted to one company or another it’s really broad and it is ongoing,� said Dennis Painchaud, director of International Government Relations at Canada’s Nexen Inc. “It is a very significant risk to our business.�

“It’s something that we have to stay on top of every day. It is a risk that is only going to grow and is probably one of the preeminent risks that we face today and will continue to face for some time.�

Luehmann said hackers were increasingly staging attack over long periods, silently collecting information over weeks or months before attacking specific targets within company operations with the information they have collected over a long period.

“It’s a new dimension of attacks that we see in Shell,� he said.


In October, security software maker Symantec Corp said it had found a mysterious virus that contained code similar to Stuxnet, called Duqu, which experts say appears designed to gather data to make it easier to launch future cyber attacks.

Other businesses can shut down their information technology (IT) systems to regularly install rapidly breached software security patches and update vulnerable operating systems.

But energy companies cannot keep taking down plants to patch up security holes.

“Oil needs to keep on flowing,� said Riemer Brouwer, head of IT security at Abu Dhabi Company for Onshore Oil Operations (ADCO).

“We have a very strategic position in the global oil and gas market,� he added. “If they could bring down one of the big players in the oil and gas market you can imagine what this will do for the oil price – it would blow the market.�

Hackers could finance their operations by using options markets to bet on the price movements caused by disruptions, Brouwer said.

“So far we haven’t had any major incidents,� he said. “But are we really in control? The answer has to be ‘no’.�

Oil prices usually rise whenever …

Continue reading: Cyber attacks threaten global oil supply

Do students need credit cards?

Sep 29, 2011 – 2:48 PM ET
| Last Updated: Sep 29, 2011 3:52 PM ET

By Jay Bryan

Josh is stressed out. With good reason.

The 26 year-old Concordia University undergraduate is struggling to manage $24,000 in credit card debt, cover his day-to-day expenses and keep up with his full-time studies. Until he qualified for a student loan this month, he was forced to work full time just to earn enough money to pay his minimum credit card payments and service another $16,000 in debt from a line of credit.

“The last year was very stressful,� he said. “I wasn’t able to achieve the grades I wanted to because I had so much stress from having to work so hard.�

Unfortunately, Josh’s story is not an unusual one on Canadian university campuses.

More than ever before, students have easy access to credit cards and lines of credit – often with very high spending limits. If used responsibly, credit instruments are a convenient payment method that can be used to build a healthy credit history, which can be helpful to a young adult hoping to buy a house or make other major purchases down the road.

But many students fail to do so.

Josh, who did not want his last name revealed for privacy reasons, obtained his first credit card at the age of 18. A student in Edmonton at the time, he was earning good wages working part time at a credit card company. Over the next few years, he spent freely and quickly racked up thousands of dollars in debt on four credit cards. Instead of putting on the brakes, the financial institutions that issued the cards raised his spending limits even though he was only in his early 20s – one card’s limit was hiked to $11,000 – and gave him the line of credit. It was a nice lifestyle. Until he was unexpectedly laid off.

Suddenly, Josh found himself scrambling to meet his debt obligations.

“Because I worked for a credit card company in Edmonton, I was very conscious of credit and credit scores and unfortunately the situation went downhill,� he said.

Josh figured he could save some money by moving to Montreal, which has a lower cost of living than Edmonton, to continue his studies. But his financial situation actually worsened when the Quebec government did not recognize him as an independent student and deemed him ineligible for its student loan program. He ended up pursing his studies and used credit to cover the funding shortfall for his education and living expenses.

Working and receiving some financial help from his parents has enabled him to get his debts somewhat under control – even though half of his monthly income now goes toward making his minimum payments – and he hopes to pay off his debts within the next 10 years.

But he worries that access to easy credit is enabling other students to wind up in the same situation.

“I found that (banks) were very happy to offer all of this money not realizing that a student’s situation can change,� he said. “There were no relief programs in any way. Or not that I was aware of.�

The substantial cost of post-secondary education today is stressful for many students. Adding credit card debt to the equation makes it even worse.

Last month, a TD Canada Trust student financial study found that 58 per cent of Canada’s post-secondary students aged 18 to 24 are worried about money. Sixty-four per cent of the students surveyed expect to graduate with debt, and one quarter of them …

Continue reading: Do students need credit cards?

BoC rate hike not likely in short term

Things are definitely looking up for the Canadian economy, but don’t bank on interest rates rising anytime soon.

With Europe’s credit mess spilling over and the faltering U.S. recovery eliciting serious talk about QE3, it’s pretty much unanimous the Bank of Canada will stand pat when setting its policy direction next Tuesday and may not budge until later this year or next year.

“The arguments are there for the Bank of Canada to start hiking rates next week, but we increasingly think that this fall might even be too early given the problems we are seeing in the global economy,� said Jimmie Jean, an economic strategist at Desjardins Capital Markets based in Montreal.

Despite encouraging news over the past week, including solid housing and jobs numbers and improving business sentiment that suggest Canada is bucking the global slowdown, not one of 37 economists and strategists recently surveyed by Reuters expects the Bank of Canada to hike rates July 19.

While some do expect a 25-basis-point increase in September, the median forecast predicts the central bank will leave its key policy rate at 1% until the fourth quarter.

Mr. Jean has pushed his rate-hike expectations out to December. In his mind, as positive as Canadian economic data have been lately, there is no urgency for the Bank of Canada to tighten policy when both Europe and the United States, the world’s two biggest markets, are struggling.

If Europe’s sovereign crisis results in a country defaulting on its debt or escalates in some other manner, it could shock the global financial system by straining funding markets for banks — Canadian ones included — to create another liquidity crunch, he said.

Meanwhile, prospects of the U.S. economy regaining its footing in the second half of the year seem to be diminishing, especially following last week’s dismal jobs report and now U.S. Federal Reserve chairman Ben Bernanke has raised the possibility of another round of quantitative easing.

“That was pretty firmly ruled out just a few weeks ago and now the possibility is being raised,� Mr. Jean said. “There’s no question that if the Fed goes QE3, the Bank of Canada is not going to hike rates.�

Karen Cordes Woods, a financial markets economist at Scotia Capital Markets said the risks of tightening monetary conditions currently outweigh the benefits and she doesn’t think the Bank of Canada will move on rates until the second quarter of 2012.

She said material tightening is being imposed on the economy from fiscal retrenchment and the strength of the Canadian dollar to stricter mortgage lending guidelines and elevated commodity prices that continue to crowd real wage growth despite the improvements in the labour market.

Although there is recent evidence of inflation creeping into the economy, it’s not nearly enough to justify a rate hike and Ms. Cordes Woods believes a move to tighten by the Bank of Canada would only put more upward pressure on the dollar and represent an unwanted headwind for the economy.

“The Bank of Canada still has time to stay on the sidelines,â€� she said. “They will do what they see fit given the conditions.â€�…

Continue reading: BoC rate hike not likely in short term

Travel Industries Remaining Afloat Even in the Midst of Crisis

The financial crisis of 2007 to 2010 has crippled a lot of enterprises. Many businesses have either closed down or resorted to downsizing. Lots of properties were foreclosed and people were suddenly out of jobs. Promising programs and innovative construction projects were halted. But even in these unfortunate turn of events, something positive and unexpected happened. Companies that are engaged in the travel and leisure industry delivered earnings that surprised economy analysts.

For example, certain cruise lines revenues climbed up to about 12 percent more than last year, earning about 40 cents per share. For Wall Street, which was anticipating a loss of 5 cents, this increase was a pleasant surprise. In addition, booking volumes of some cruise lines increased up to 20 percent and net costs per average cruise were down to 2.2 percent. Travel agencies also had their share of increase in revenue and stock value. Because they offered attractive discounts, packages, and moneysaving deals to stay afloat, people took the bait. Thus, many agencies reported earnings of 15 cents per share, 8 cents more than analysts were looking for. Revenues of some major online travel agencies even topped out at 24 percent. Hotels also had their share of financial triumph. Some delivered an increase of 11 cents per share.

These are impressive numbers but what caused the increase of profits and stocks? Analysts determined a variety of factors. First is increased corporate travel so executives can check on ailing branches. Second is the sudden influx of Asian tourists who found travelling to countries affected by the crisis more financially viable because of more relaxed entry requirements, which helped draw more tourists to aid their economies. Lastly, executives of travelrelated companies remained optimistic and bullish because of the fact that travel, like food, is a necessary commodity.…

Continue reading: Travel Industries Remaining Afloat Even in the Midst of Crisis

Africa Israel Buys High, Sells Low

Africa Israel Buys High, Sells Low

Africa Israel Investments Ltd. was one of the most aggressive foreign buyers of U.S. commercial real estate during the boom, snapping up or building trophy properties in New York and Miami and hatching grand development plans in Phoenix and Las Vegas.

Now, after big losses, the Israel-based company, which is run by a Uzbek-born diamond tycoon, is selling some of those properties for significantly less than it paid.

In recent weeks, Africa Israel has struck agreements to sell a major piece of the former New York Times headquarters and the landmark Clock Tower building overlooking Madison Square Park in Manhattan, both at steep losses. It also has unloaded numerous parcels of land in Florida.

The company cited improving commercial markets in New York and other regions as the main reason for its moves. As recently as a few months ago, Africa Israel had said it planned to develop the Clock Tower and New York Times properties.

We are trying to cash out a little bit, said Izzy Cohen, chief executive of Africa Israel, in an interview Tuesday.

Africa Israel in 2008 reported a loss of 4.9 billion shekels ($1.43 billion) and wrote down the value of its U.S. portfolio. It posted a loss of 800 million shekels in 2009. In 2010, the company recorded a profit of 1.8 billion shekels, but most of this was a capital gain recorded from debt restructuring, according to Dan Harverd, an analyst at Deutsche Bank.

Africa Israel, headed by diamond-industry billionaire Lev Leviev, is the latest overseas company to run aground in the U.S. commercial market. In the late 1980s, Japanese investors purchased such iconic properties as Rockefeller Center and the Pebble Beach golf resort, only to suffer losses during the early 1990s recession.

During the recent boom, Irish lender Anglo Irish Bank Corp. made several loans to fund New York hotels and condos and other U.S. projects near the peak. The bank, which has been nationalized, is marketing a $10 billion portfolio of U.S. real-estate loans that is expected to sell at a discount to face value. Anglo Irish couldnt be reached to comment.

Foreign investors often make the mistake of looking at U.S. real estate as a safe haven. The U.S. market is one of the most transparent, the government is stable and foreigners often invest with a long-term horizon, said Mark Edelstein, head of the real-estate group at law firm Morrison Foerster LLP. The problem is they often buy near the top of the market and overpay.

We paid market prices, said Africa Israel USA Chief Executive Tamir Kazaz. We paid them at the peak.

Many of Africa Israels recent deals have resulted in big losses. It paid $200 million for the Clock Tower building in 2007 and spent tens of millions of dollars to convert it to condominiums, only to announce in May that it has a buyer in contract for $170 million. The buyer, fashion designer Tommy Hilfiger, hasnt yet closed on the deal.

Likewise, the company in April said that it was selling 11 of 16 floors at the former New York Times headquarters on West 43rd Street in New York to Blackstone Group LP for $160 million, far less than the $525 million it had paid for the property in 2007.

Mr. Kazaz said the company could buy U.S. properties in the future. We are not buying now. We still have significant inventory to sell.

Africa Israels losses have proved to be a black eye for Mr. Leviev, the companys chairman, who immigrated to Israel with his family from Uzbekistan in …

Continue reading: Africa Israel Buys High, Sells Low