U.S. ISM Factory Index Decreased to 48.3 in February

March 3 (Bloomberg) -- Manufacturing in the U.S. contracted in February at the fastest pace in almost five years, pushing the economy closer to a recession.

The Institute for Supply Management's manufacturing index dropped to 48.3, the lowest level since April 2003, from 50.7 in January, the Tempe, Arizona-based group said today. Fifty is the dividing line between contraction and expansion.

The collapse in housing is rippling through the economy as consumers curb spending and factories reduce production of furniture, automobiles and appliances. Credit restrictions may continue to hurt economic growth, prompting Federal Reserve policy makers to lower interest rates again this month.

``The evidence is piling up that the economy is slipping into at least a mild recession,'' said Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis, who forecast the index would drop to 48. ``With the much higher food and energy prices and restricted credit, there are not a lot of avenues for consumers to continue to spend.''

Economists surveyed by Bloomberg News forecast the index would fall to 48, according to the median estimate of 68 economists. Economists' forecasts ranged from 45 to 51.

New orders decreased to 49.1 from 49.5, while a production measure dropped to 50.7 from 55.2, ISM said. A gauge of supplier deliveries fell to 50.1 from 52.8 in the prior month.

The group's measure of prices paid decreased to 75.5 from 76 in January. Economists had forecast the measure would fall to 73.

Fewer Inventories

The inventory index in today's ISM report slumped to 45.4 from 49.1. Figures less than 50 mean manufacturers are reducing stockpiles. ISM's employment measure declined to 46 from 47.1.

Today's factory survey corroborates other regional business polls in the past two weeks that showed factory activity, which accounts for about 12 percent of gross domestic product, contracted in February.

The National Association of Purchasing Management-Chicago reported Feb. 29 that business activity fell to the lowest level in more than six years. A Philadelphia Fed gauge showed the deepest contraction in seven years, while the Fed Bank of New York's economic index was the weakest in almost five years.

Government data also have pointed to a slowdown. Orders for durable goods excluding transportation equipment fell in January for the third time in the last four months, Commerce said last week. Factory production stalled in January, with car output falling, the Fed said Feb. 15.

Housing Slump

A third year of declining home construction will drag on growth again this year, costing jobs and undermining the consumer spending that accounts for two-thirds of the economy. As property values decline, Americans feel less wealthy and buy fewer televisions and cars.

Sales at General Motors Corp., Ford Motor Co. and Chrysler LLC, which account for about half of U.S. auto purchases, probably fell at least 14 percent in February from a year earlier, according to a Bloomberg survey of analysts before an industry report today.

Demand for cars is at the ``low end'' of the range forecast, said George Pipas, chief sales analyst for Ford, in Dearborn, Michigan, on a conference call last week.

The economy will grow at a 0.5 percent annual rate from January through March, capping the weakest six months since the last economic slump in 2001, according to the median estimate of economists polled by Bloomberg from Jan. 30 to Feb. 7.

The Fed, which has lowered the benchmark rate by 2.25 percentage points since September, is ready to continue cutting borrowing costs if needed, Chairman Ben S. Bernanke told Congress last week.

Growth Risks

He warned that risks to the outlook include ``the possibilities that the housing market or the labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further.''

One of the few bright spots is record exports as a weak dollar and growing economies in countries such as China, Brazil and Mexico stoke demand for goods to modernize their infrastructure and production capacity.

The ISM's measure of export orders decreased to 56 from 58.5, showing foreign demand is still growing, though at a slower pace.

``We certainly have seen among some of our customers and even in our own business some benefits from a weaker dollar in terms of increased strength in an export capacity,'' Frank MacInnis, chairman of in Norwalk, Connecticut-based EMCOR Group Inc., a construction and facilities-management company, said in a Bloomberg Television interview last week.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

Irrational Pessimism Pummels U.S. Bond Market

March 3 (Bloomberg) -- What a difference a year makes.

Each year, Jim Reid and his colleagues at Deutsche Bank AG publish an influential analysis of credit markets that puts current yields and fundamentals in historical perspective.

If you buy a bond from a company that might go bankrupt, then you expect to receive a higher interest rate. In an efficient and well-functioning market, the higher yield in a diversified portfolio of such bonds should offset the losses you would incur over time because of defaults. If a 10-year Treasury is yielding 4 percent, then you should only buy a 10-year bond from a company with a good chance of defaulting if the yield is significantly higher than 4 percent.

How much higher? That is exactly the question addressed with impressive analytical precision by the Deutsche Bank report. It provides a great thermometer reading of the bond market. The report calculates how large the default probabilities must be to command the current yields on different classes of bonds.

A comparison of this year's report with last year's provides a striking and even startling view of how rough the credit crisis has become.

``Last year, spreads on high-yield bonds were so low, that you could have expected to lose money if you purchased them, even if they defaulted at the lowest rate in history,'' Reid, head of fundamental credit research at Deutsche Bank in London, said in an interview last week. ``This year, spreads are so high that you can expect to make money even if they default at the highest rate in history.''

Default Rate

That's one way to say that corporate bonds look like a good buy right now. If you think about it in terms of implied default probabilities, the analysis gets downright shocking.

Looking at the iBoxx Dollar Liquid Investment Grade Index, Reid and his colleagues estimate that current spreads imply that 19 percent of five-year bonds in the index will default during the next five years. This is an unbelievably high rate.

The highest default rate for these bonds was just 2.4 percent, and the average rate since 1970 was 0.8 percent.

From Citigroup Inc. to JPMorgan Chase & Co., financial firms have been particularly hard hit in this crisis. This is apparent in Reid's numbers as well.

Current prices suggest that 21 percent of five-year bonds in the financial industry are expected to default during the next five years. This places financial bonds -- the debt of some of the bluest of blue-chip firms -- smack dab between single A- rated bonds (which have an implied expected default rate of 20 percent) and BBB-rated bonds (which have an implied expected default rate of 22 percent.)

Historical Record

Those implied default rates are also way outside of historical experience. The highest five-year default rate for A- rated bonds was 2.5 percent. The most for BBB-rated bonds was 5.8 percent.

The mayhem, of course, hasn't just affected five-year bonds. Longer maturities have even more extreme default scenarios priced in. Current prices suggest that 29 percent of corporate bonds will default over the next 10 years. That rate is six times higher than any 10-year period since 1970.

It is worth noting that these default probabilities are probably somewhat inflated, as default risk isn't the sole consideration when looking at bond prices. Even so, the market is pricing in a bond-market catastrophe that's far worse than anything that has ever happened.

Expecting a Calamity

What should one make of these numbers? Even an optimist should be startled by what bond markets are saying. The market isn't just expecting a downturn; it's expecting a calamity. A University of Chicago-style believer in the absolute wisdom of markets should be loading up on canned goods and checking the fortification of his underground bunker.

A more rational response to this report might be to recognize that markets, while they are right on average, tend to overreact in both directions. A person with this sentiment would have looked at last year's prices and concluded that they were irrationally low. Now, panic has set in, and spreads are way too high, pricing in something close to the end of civilization.

The world economy has survived wars, oil embargoes and even a depression. That suggests it can survive this, too, even if things get worse before they get better. If you believe that, then a buy-and-hold strategy on bonds looks about as good as it ever will. If enough investors see that, then this credit crunch might finally begin to ease.

(Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He is an adviser to Republican Senator John McCain of Arizona in his bid for the 2008 presidential nomination. The opinions expressed are his own.)

To contact the writer of this column: Kevin Hassett at khassett@aei.org

Northrop, EADS land $35 bln airborne tanker deal

NEW YORK (MarketWatch) -- In a major upset, the Air Force on Friday tapped Northrop Grumman Corp. and EADS to build 179 of its next-generation airborne refueling tankers, a deal worth at least $35 billion.

Aftermarket revenue for parts and maintenance could easily add another $60 billion to their coffers, making it one of the largest defense contracts on record. It could also grow to include eventual replacement of the Air Force's 500 Stratotankers, many of which are already more than 40 years old.

The contract was originally estimated to be worth $40 billion, but the deal Northrop and EADS finally agreed to was $5 billion less.

The first phase of the work calls for developing four test KC-45 aircraft for $1.5 billion. The plane had been dubbed the KC-30 through the bidding process.

Once the basic design has been hammered out, the contract calls for delivery of 64 more aircraft at a cost of about $10.6 billion.

The deal strengthens Los Angeles-based Northrop's chance of landing future airborne tanker orders and expands EADS' role in supplying the U.S. military. The partners have said the plane would be built at facilities in Mobile, Ala., creating 5,000 new jobs in the process.

Defense industry analysts had widely expected Boeing Co. to submit the winning bid, using a converted 767 commercial airliner as the platform for the new military tanker. The KC-767 is smaller than the converted A330 aircraft offered by Northrop and built by the Airbus unit of EADS (FR:005730) , the acronym for the European Aeronautic Defence and Space Co.

In after-hours trading following the news, shares of Northrop (NOC) fell rose 5.6% to $83. Boeing (BA) shares fell 3.2% to $80.11.

Boeing will be briefed on the decision on or after March 12. The Chicago-based company is likely to file a protest with the Government Accountability Office. The Air Force wouldn't provide details as to why Boeing was not chosen, but stressed its decision process was well documented.

"The records are clear and well documented, and Boeing has known all along where they stand in the process," said Sue Payton, assistant secretary of Air Force Acquisition in a news conference announcing the deal.

Once the protest is filed, the GAO has 100 days to either dismiss Boeing's complaint or find in favor of the company.

During the conference, Air Force General Arthur Lichte said the Northrop bid was chosen because its aircraft could carry more passengers, cargo, and fuel while also offering more flexibility and dependability over Boeing's offer.

"Overall, Northrop was strong in aero refueling and airlift, as well as in past performance, and offered great advantage to the government in cost," added Payton.

Later Payton added that the creation of American jobs was not a factor in choosing the Northrop, EADS offer.

The KC-45 is based on the Airbus A330 tanker that has already won four awards in Australia, Britain, the United Arab Emirates, and Saudi Arabia.

Dollar tumbles to three-year low versus yen Renewed risk aversion boosts Japanese currency, other low-yielders

LONDON (MarketWatch) -- Last week it was the euro; now it's the Japanese yen's turn to explore historic strength against the U.S. dollar.

The yen ended last week on a strong note, then extended gains in Asian and early European activity Monday to rally to its strongest level against the U.S. dollar in three years.

Foreign-exchange strategists linked the move mainly to renewed concerns about the U.S. economy and the prospect for further turmoil in the global financial sector.

The yen was 0.7% higher against the dollar at 102.99 yen in recent activity, after hitting 102.59 earlier in the session, according to data from FactSet. With the yen leading the way, the dollar was lower against most other major counterparts.

The dollar index, which measures the greenback against a trade-weighted basket of six major currencies, was quoted at 73.732 in recent action after dipping to its lowest level since the index was created in 1973.

Bouts of risk aversion have proven supportive to the yen in recent months as it leads traders to shun once-popular "carry trades." In a carry trade, a player borrows in a low-yielding currency, such as the yen or the Swiss franc, and then uses the funds to buy assets denominated in a higher-yielding currency.

Combined with underlying ideas the U.S. economy may already be in recession and expectations the U.S. Federal Reserve will continue aggressively cutting interest rates, the stage was set for further gains against the dollar by major currencies, analysts said.

Strong gains by the low-yielding Swiss franc indicated that risk aversion was the main theme of the day, said Roberto Mialich, a foreign-exchange strategist with UniCredit. The Swiss unit was trading near $1.0403 against the dollar, a gain of 0.1% on the day. Earlier, the dollar traded as low as $1.0305 against the Swiss franc.

Japanese stocks were hit hard as the yen rose. The stronger currency put pressure on Japanese exporters, analysts said. Tokyo's 225-issue Nikkei Stock Average dropped 3.6% to 13,114.30 and the broader Topix index sank 3.4% to 1,278.84. See full story.

Meanwhile, Japanese officials gave no indication of concern about the yen's gains -- a factor that further encouraged the currency's rally, Mialich said. If traders begin to perceive an attitude of "benign neglect" toward a stronger yen by Japanese officials, the currency could soon make a test of the 100-yen level against the dollar, he said.

The euro, which last week marched to record territory against the greenback, was slightly higher against the U.S. unit at $1.5166. The European single currency was 0.7% lower against the surging Japanese currency at 156.14 yen, and was holding a gain of around 0.2% against sterling at 0.7640 British pounds.

The pound, meanwhile, was on the defensive against the greenback, losing 0.2% to $1.9849.

The European Central Bank and the Bank of England both hold policy meetings Thursday. Both are expected to keep interest rates on hold for this month.

Stronger-than-expected European economic data, including last week's unexpected rise in Germany's Ifo index of business sentiment, have contributed to expectations the ECB will leave its key lending rate on hold, analysts said. More global coverage.

A preliminary estimate of consumer price inflation across the 15 nations that make up the euro-zone was in line with market expectations for a 3.2% rise in February, according to data released by European Union statistical agency Eurostat. That matched the record pace seen in January and remains well above the ECB's medium-term target of under 2%.

Bank of England policymakers, meanwhile, have acknowledged risks of an economic slowdown. But they've also emphasized near-term concerns about inflation, focusing on its potential impact on consumers' longer-term inflation expectations. The bank's Monetary Policy Committee is expected to leave its key rate on hold at 5.25% after cutting by a quarter-point in February.

"Markedly faltering U.K. growth and the very real risk of a sharp economic downturn mean that further interest rate cuts are clearly on the Bank of England's agenda," wrote Howard Archer, chief U.K. and European economist at Global Insight. "Nevertheless, [Thursday's] meeting of the Monetary Policy Committee is highly likely to prove too soon to yield the next 25-basis-point interest rate cut to 5.00% given current elevated inflationary pressures."

Meanwhile, the U.K. CIPS purchasing managers index for manufacturing posted a stronger-than-expected rise to 51.3 in February, up from 50.7 in January, news reports said. Market expectations were for a reading of 51.0.

Analysts said PMI data for the services sector due for release on Wednesday could have an impact on U.K. rate expectations.

"Sterling faces another volatile week, with the services PMI survey on Wednesday likely to trigger a very ... jittery 24 hours ahead of the BOE verdict on Thursday," wrote analysts at Lloyds TSB. "A sharp drop for the PMI and wider [spreads between the London interbank overnight rate, or Libor, and the central bank's base rate] could spark sterling selling," potentially pushing the euro to another round of new highs against the pound.

Diebold gets $2.63 bln bid by United Technologies

Proposed deal is $40-share; maker of ATMs had rebuffed earlier overture

NEW YORK (MarketWatch) - United Technologies Corp. proposed to acquire Diebold Inc., the producer of automatic teller machines, voting terminals, retailing systems and other technology, for $40 a share, or $2.63 billion.

In a statement late on Sunday, United Technologies (UTX) , the Hartford, Conn., industrial and technology giant, laid out its proposal to acquire Diebold, which is based in North Canton, Ohio.

It made the public proposal after Diebold's board rebuffed an earlier takeover overture from United Technologies.

United Technologies also has told Diebold that if it could conduct a due-diligence financial review, it might be prepared to boost the $40 deal price.

That $40 price is 66% above Diebold's (DBD) closing price Friday of $24.12. In premarket trading Monday, shares were up 65% to $39.83 while United Technologies shares remained unchanged at $70.51.

In the past year, Diebold's shares touched a high of $54.50 last July and a low of $23.07, on Jan. 23, 2008.

UTX says its proposal is fully financed. The deal would be conditioned on a due-diligence review of Diebold and on regulatory clearances, United Technologies said.

"Diebold represents an excellent fit with" United Technologies, UTX Chairman and Chief Executive Officer George David said in the Sunday statement.

United Technologies makes its case

In a letter dated Feb. 19, which United Technologies made public, David proposed to Diebold Chairman John N. Lauer a deal at "a significant premium to the current trading price."

David said that UTX's "resources and presence in markets globally would be significant assets" in helping Diebold expand worldwide and build profitability.

United Tech sees complementary characteristics between several of its businesses and Diebold. For one, UTX's Otis Elevator has a 400-location network of offices and service centers. And Carrier air conditioners and UTC Fire and Security have comparable business models, United Tech said.

United Tech also called itself "exceptionally technology intensive," spending more than $3.5 billion a year on research and development.

Financing would come from cash on hand and other "readily available" sources, the letter said.

In a Feb. 21 response, Lauer said Diebold's board took up United Tech's proposal "extensively" at a regular meeting. The directors voted unanimously that pursuing a combination with United Technologies "was not in the best interests" of Diebold or its holders, Lauer's letter said.

Eight days later, David told Lauer that after due diligence, United Technologies might be prepared to go beyond $40 a share. And he said that if UTX couldn't talk with Diebold's board, it would take the matter directly to Diebold's holders, which according to regulatory filings include mutual fund giant Fidelity Investments and Cooke & Beiler, a Philadelphia investment firm.

Early in February, Diebold estimated 2007 revenue at $2.95 billion, which would rise 6% to 8% in 2008. The company had said it was disappointed with the revenue growth it posted for 2007. And it also said it would cut about 5% of its global workforce to reduce costs.

Diebold also said then that the board's audit committee and regulators were continuing to review the company's accounting.

Morgan Stanley is advising United Technologies on the takeover proposal.

Gold and oil futures hit new highs as greenback slides

NEW YORK (MarketWatch) -- U.S. stocks on Monday fell ahead of manufacturing data likely to show industrial activity on the wane and as the dollar index declined to its lowest level since its inception in 1973.

The Dow Jones Industrial Average ($INDU) fell 79.05 points to 12,187.34, with 20 of its 30 components trading lower.

The S&P 500 ($SPX) declined 8.57 points to 1,322.06, while the Nasdaq Composite (COMP) shed 15.51 points to 2,255.97.

Shares of E-Trade Financial Corp. (ETFC) gained 2% on speculation the beleaguered online brokerage may be positioning itself for a potential sale. Read full story.

Diebold Inc. (DBD) shares jumped 61% on news United Technologies Corp. (UTX) had offered to buy the maker of ATM and voting machines.

Shares of United Technologies slid more than 3%.

Gold and crude-oil futures surged to new record highs, propelled by sharp weakness in the U.S. dollar. Gold for April delivery hit a record of $991 an ounce, while crude oil for April delivery soared to a record of $103.51 a barrel on the New York Mercantile Exchange.

"We anticipate holding a larger than ordinary exposure to bonds to cushion the wild equity markets," said Paul Nolte, director of investments at Hinsdale Associates.

Treasury prices on Monday were mixed to lower, with the benchmark 10-year note off 13/32 at 99.16, its yield ($TNX) up to 3.555%.

The Institute of Supply Management's manufacturing gauge for February may fall back under the 50% mark, indicating economic contraction, economists predicted, after regional polls in New York, Philadelphia and elsewhere indicated downturns.

Readings under 50% in the ISM index indicate that the manufacturing sector is contracting, but it takes a much weaker reading near 41% for a recession to be called, economists say.

The ISM data is due out at 10 a.m. Eastern.

U.S. stocks plunged on Friday, with the Dow industrials losing 315 points, the S&P 500 dropping 37 points and the Nasdaq Composite losing 60 points. American International Group led the downturn after posting its largest loss in almost 90 years of business.

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Major world stock exchange expands investor access to

Tokyo Stock Exchange
Major world stock exchange expands investor access to include timely inancial news with Web-based system

In the fast-paced world of international invest-ment, time is money. Within minutes, billions
of dollars change hands over the Tokyo Stock Exchange (TSE), one of the world’s major stock
exchanges. To an outsider, the frenzied buying and selling of stocks might seem almost random.
Yet behind most stock sales and purchases is a well-thought-out investment strategy driven
in part by current inancial news. Recognizing this, the Tokyo Stock Exchange developed an
innovative system, called the Timely Disclosure Network (TDnet), that gives investors instant
access to Adobe Portable Document Format (PDF) iles with inancial information on TSE-
listed companies.

The Tokyo Stock Exchange launched TD net in 1998, and soon after it recommended to the
1,940 companies listed on the Exchange that they submit disclosure documents in Adobe PDF.
The reasons, according to Koji Yoshida, who oversees disclosure for the TSE, are simple:
“Compact Adobe PDF iles maintain the integ-rity of company information, deliver it in a format that is universally accessible, and can be distributed quickly over the Internet.” This rapid,ficient document distribution is critical, since the TDnet Web site can receive more than one million hits daily from viewers worldwide.

Speed, convenience with Adobe PDF
Each listed company on the TSE iles approxi-mately 20 pages of disclosure documents, such as annual and interim inancial reports and other press releases. Previously, these docu-ments were submitted on paper and stored at TSE ofices. Financial analysts and investors who wanted to review information had to come to the Exchange and read the papers, making infor-mation dificult to access for most people. By moving documents online in Adobe PDF, the TSE greatly expanded investor access to inancial information and streamlined the delivery of disclosure documents for companies.

Now, listed companies use Adobe Acrobat soft-ware to create Adobe PDF iles that the TSE dis-tributes over satellite and private networks and posts on TDnet for immediate viewing. During peak periods, the TSE can receive as many as 700 documents daily from listed companies. “TDnet is a powerful system that shortens the distance between investors and companies,” explains Yoshida. “With platform- and application-independent Adobe PDF iles, we know that inves-tors—no matter where they are and no matter what systems they are
using—can access essential inancial information.”

Easy conversion of any document
An important factor in the TSE’s decision to adopt Adobe Acrobat and Adobe PDF for online document delivery is the openness of both the application and the format. Because the TSE
does not dictate which application listed com-panies must use to create disclosure statements,