Financial thoughts

Federal health regulators asked the country’s leading medical experts two years ago to recommend ways to improve the government’s system for approving most medical devices, ranging from pacemakers to X-ray scanners. On Friday the experts came back with a surprise answer: Scrap it because it fails to protect patients. Even more surprising, the FDA dismissed the idea.

The Institute of Medicine’s panel said in a report that the U.S. government should abandon the 35-year-old system used to clear medical devices because it provides little assurance that the implants are actually safe.

The 12-member group’s advice, commissioned by the Food and Drug Administration, is not binding. And experts questioned its real-world impact after the FDA immediately distanced itself from the advice it had requested.

The FDA has been working for more than a year to improve the so-called 510(k) process, efforts that would go to waste if the system is abandoned.

“FDA believes that the 510(k) process should not be eliminated, but we are open to additional proposals and approaches,” said the agency’s device director Jeffrey Shuren.

The agency requires that most new prescription drugs go through clinical trials to prove that patients fare better after receiving medication. But through the 510(k) system, medical devices just have to show that they are similar to devices already on the market. Only a handful of truly new devices undergo extensive testing to prove they are safe and effective.

The device industry’s chief lobbying group also dismissed the proposal, saying its conclusions “do not deserve serious consideration from the Congress or the administration,” in a statement.

The IOM panel’s chairman took the reception in stride Friday, saying it would take time to develop a new system to replace the one that has been in place for over three decades.

“This is a public discussion, and it’s going to take time,” said panel chair David Challoner, former vice president of health affairs at University of Florida. “The 510(k) process needs to be modified to make it as good as possible in the interim, but there is logic there that is fundamentally flawed and must to be fixed.”

The report arrives as the FDA fends off criticism from manufacturers who say the agency has become too slow in clearing new devices, driving up costs for companies and forcing some out of business. Despite the relative speed of the 510(k) process, they point out that some devices still get tied up in red tape, ultimately reaching the U.S. market two years after launching overseas.

Latham & Watkins attorney John Manthei, who represents device manufacturers, said even if the FDA doesn’t adopt the recommendations, they could help lawmakers and critics who favor tougher regulation of devices.

“For those who feel like the 510(k) process is inadequate, this report definitely gives those folks ammunition,” said Manthei.

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Greek officials launched talks with international bankers Thursday on the details of a complex plan to restructure the loan-dependent country’s privately held debt under a new bailout deal.

Finance Minister Evangelos Venizelos said the Athens negotiations started “in a most encouraging manner.”

“We have started (the talks) and will conclude very soon because we face specific bonds maturing in August and September and want either to have finished before that or to have formulated a transitional framework until we have finished,” Venizelos told parliament.

Last week, European leaders agreed on a second bailout for Greece worth a total euro109 billion ($155 billion) _ on top of a euro110 billion deal in 2010 _ to protect the country from looming default and ease its massive debt burden.

The agreement called for banks, pension funds and other private institutions that hold Greek debt to voluntarily swap their bonds for new ones with lower interest rates or slightly smaller face value.

On Thursday, the French finance ministry said local lenders will participate with all their Greek bonds that mature by 2020, worth “about euro15 billion.”

Provided overall private sector participation meets a targeted 90 percent, the swap will involve some euro135 billion worth of bonds that mature by the end of 2020, with bondholders taking a net 21 percent loss.

“We want the process to be immediately implemented and we want the duration of its implementation to be the shortest possible,” Venizelos said.

Greece is unable to borrow from international money markets as the interest rates currently demanded exceed 15 percent, with its bonds designated barely above the level of default by all three major international ratings agencies.

The duration of the bond swap process is crucial, because for that period Greece will most likely be rated in default _ a humiliating first for a country using the euro payday advance.

However, provisions in the bailout that secure Greek banks’ credit lines mean the default rating should have limited practical repercussions.

“There will be no problem for Greek banks,” Venizelos said. “There is no issue with their liquidity, and ratings have no practical significance.”

Despite strong opposition from trade unions and even some of its own lawmakers, Greece’s Socialist government has implemented harsh austerity measures for more than a year, cutting pensions and public sector salaries while increasing taxes and retirement ages.

Other measures include an ambitious euro50 billion ($71 billion) privatization program by 2015, and a series of reforms to open up tightly regulated professions such as lawyers, pharmacists and truck drivers.

Taxi drivers, who are also affected by the reforms, have been on strike for the past 11 days, alarming Greece’s tourism industry _ a key earner _ by periodically blocking airports and harbors.

On Thursday, hundreds of protesting taxi drivers clashed with the police in Greece’s largest port of Piraeus, which adjoins Athens, after preventing thousands of foreign cruise ship passengers from boarding tour coaches to the capital’s ancient sites. No injuries or arrests were reported. Strikers also held a peaceful protest at the northern port of Thessaloniki.

Tourism Minister Pavlos Geroulanos appealed for calm.

“The situation at the harbor this morning is extremely dangerous for tourism,” he said. “Every Greek family lives from tourism, and I believe it is a sector that everybody must protect.”

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Union members broke off negotiations Tuesday at the world’s most productive copper mine, threatening to extend their five-day strike indefinitely and warning that thousands of other Chilean copper workers may soon walk off the job as well.

Union leader Marcelo Tapia told The Associated Press that the Escondida mine’s 2,300 striking workers will be joined Wednesday by 7,000 contractors, and that union workers at Chile’s state-owned Codelco mining company are in consultations about whether to join them on Thursday.

The main issue is a monthly production bonus: The company, majority-owned by Australian mining company BHP Billiton Ltd., is prepared to pay bonuses that would total $6,000 per worker by year’s end, and declined on Tuesday to discuss an increase. The union is holding out for $10,800 per worker, Tapia said.

Shares in BHP Billiton Ltd were trading up about 1 percent at $94.83 after dropping earlier Tuesday on the strike news. Globally, prices for copper and other metals have been buoyed by fears that the dollar and euro will fall due to the U.S. debt crisis and European economic woes. Prices of copper for September delivery rose 1.6 percent Tuesday to $4.48 a pound.

Already, the strike has cost the company 15,000 tons of lost production, at an estimated cost of $150 million, the company has said.

Escondida represents the biggest single foreign investment in Chile, with BHP owning a 57 percent share. Other major investors include Rio Tinto, Mitsubishi Corp. and International Finance Corp. Each day, the mine has produced about 3,000 tons of copper, worth about $30 million. In all, the mine produces 1.1 million tons of refined copper annually. At one point, its production totaled about 8 percent of the world’s copper supply, although that has declined slightly.

The amount the union wants in bonuses represents less than a penny of each dollar in annual earnings, 0.58 percent.

The situation deteriorated Tuesday when 7,000 subcontractors announced they will join the strike, adding their own demands, including a bonus equivalent to 30 percent of the amount regular employees will get, said Jorge Marin, president of Escondida’s Contract Worker Federation.

The union plans to go to court Wednesday, alleging anti-union actions by the company, Tapia said.

The union also wants protections for workers who contract serious illnesses on the job, only to lose their private health care on retirement. They say company surveillance cameras violate their privacy rights, but they want to punch clocks that better control their 12-hour work days. Miners are frequently working up to 14 hours a day but don’t get their overtime, Tapia alleged.

Tapia challenged company claims that bonuses are down due to lowered production, saying that it costs Escondida 90 cents a pound to produce the metal now selling at about $4.40 globally.

Escondida’s last major strike, in 2009, turned out well for the workers, who got bonuses and easy credit worth $37,000 each.

As with other mines in Chile, Escondida’s production has been falling as the best veins in established operations get tapped out. But BHP Billiton recently announced a major new find of 19 million tons of copper reserves. The discovery, which took four years of exploration at a cost of $381 million, means the company will be able to challenge Codelco’s status as the world’s biggest copper producer.

Chile’s copper strikes are helping to keep prices for the commodity near all-time highs, although other factors such as the falling U.S. dollar have done more recently to drive up short-term prices, metals analyst Shayne Heffernan of Heffernan Capital Management. He said this could change should strikes expand in Chile as well as South Africa and Indonesia.

“Given the number of strikes and the speed at which they are spreading, the loss of global production is now starting to mount. Should we see another month of this activity it may raise the annual shortfall this year to over 850,000 tons and copper trading at over $6 a pound,” Heffernan said. “Demand for copper is making it a more attractive inflation hedge than gold.”

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The tax credit compromise unveiled last week by Missouri lawmakers would do many things.

It would set up a fund to help high-tech startups grow. It would create new incentives to draw data centers and big-time college sports to Missouri payday loan lenders. And it could boost the state treasury by as much as $1.5 billion over the next 15 years, providing money to pay for roads or schools

So much for fears that U.S. companies might stall out in the economy’s soft patch.

Corporate profits are coming in better than expected so far in second-quarter earnings season despite concerns about the potential for trouble ahead.

Strong showings from blue-chip companies such as Apple, Coca-Cola and McDonald’s have put the quarter on track to set a new record for operating earnings.

“The corporate sector’s in great shape,” says Joseph LaVorgna, chief U.S. economist at Deutsche Bank. “The economy is a little healthier than we thought it was.”

Aside from companies’ continuing stubbornness about hiring more workers, the early results are good news for investors and anyone worried that the debt-limit standoff in Washington or the financial crisis in Europe could inflict serious damage.

Consumers’ willingness to spend on fast food, electronic gadgets and other items has helped fuel better-than-expected quarterly results. Among the standouts:

_ Apple Inc. more than doubled its profit to $7.31 billion on an 82 percent jump in revenue, further testimony to the runaway popularity of the iPhone and iPad.

_ Coca-Cola Co. more than tripled net income to $5.77 billion as the world’s largest drink maker increased its strength in emerging markets, such as Latin America, India and China, while sales held stable in the U.S. and Europe.

_ Harley-Davidson Inc. more than doubled its profit to $191 million, posting an increase in U.S. motorcycle sales for the first time since 2006 and expanding its market share overseas.

_ McDonald’s Corp. increased net income 15 percent to $1.4 billion on a 16 percent jump in revenue, attracting more customers for its broadening menu and array of coffee drinks even as it raised prices.

Companies in several other industries also blew past Wall Street’s expectations this week, including credit card issuer American Express Co., toy maker Hasbro Inc., oil services company Halliburton Co., computer company IBM Corp., chipmaker Intel Corp. and health insurer UnitedHealth Group Inc.

All told, 148 companies in the Standard & Poor’s 500 index have reported earnings and 73 percent have beaten the expectations of Wall Street. That’s somewhat ahead of the typical pace of two-thirds that surpass estimates.

Companies that had reported as of Friday had $24.52 per share in operating earnings _ profits before subtracting interest and tax expenses _ according to S&P senior index analyst Howard Silverblatt. The record of $24.06 per share was set in the second quarter of 2007.

Wall Street analysts forecast the next two quarters to be even better at $25.30 per share in the third quarter and $26.47 per share in the fourth. That’s assuming the economy isn’t dragged down by the deficit-reduction impasse or another problem.

Coming out of the recession, corporations first reported explosive earnings growth early last year. The pace has slowed, but it’s still going. At the current rate, second-quarter earnings would be 17 percent better than a year ago.

It hasn’t all been smooth going, as Caterpillar Inc.’s big earnings shortfall Friday underscored. The world’s largest maker of construction and mining equipment took a hit because of the earthquake and tsunami disaster in Japan.

Other stumbles this week came from drugmaker Johnson & Johnson, appliance maker Whirlpool Corp. and big airline companies weighed down by higher fuel costs: AMR Corp. and US Airways Group Inc.

CEOs and chief financial executives also have been notably cautious in their comments about coming quarters, according to Quincy Krosby, financial market strategist with Prudential Financial.

“A little bit of uncertainty has crept into companies’ guidance,” Krosby says. “”You’re hearing a lot of `It’s challenging,’ `It’s difficult,’ `We think we’re going to do well but we’re not sure.’” That hedging language, she says, has to do with the possibility for further trouble to develop from the ongoing economic and political dramas in Europe and Washington.

Yet the stock market itself hasn’t shown much sign of concern. The S&P 500 rose 2.2 percent this week after having been down 2 percent during the previous two weeks.

That shows that investors aren’t viewing companies’ positive showings skeptically, says Rob Stein, founder and senior portfolio manager for Chicago-based Astor Asset Management.

“Earnings season has been at the higher end of expectations,” he says. “More importantly, it’s been well-received by the Street.”

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The merger of Express Scripts with Medco would create a behemoth with a finger in 30 percent of the nation’s prescriptions

Max & Erma’s, the casual dining chain known for its burgers and fresh cookies, is staging a comeback. After filing for bankruptcy and being taken over by a new owner last year, it’s now planning to expand starting here in the St. Louis region.

It will open its first new restaurant since the reorganization in Fairview Heights.

The franchised restaurant is scheduled to open its doors late next month in the space formerly occupied by Hanley’s Grille & Tap (and before that a J. Buck’s) near St. Clair Square. Another location is slated to open in late October in Des Peres, also in the former Hanley’s Grille and J. Bucks, at West County Mall.

In total, the Columbus-based company will open three new franchised restaurants this year, including the two in this region.

“Once Max & Erma’s restructured, it became a good time to open up some new restaurants,” said Ed Goergen, the local franchisee. His business partner is Steve Welkener. “We really like where the concept is moving forward.”

The changes already put into place under the new ownership such as the new easier-to-read menus and new happy hour specials and appetizers such as chicken wings have already helped drive better sales at his two other Max & Erma’s restaurants in this area, he said.

And he’s looking forward to the new burgers being rolled out next month that are fresher and hand smashed in the restaurant instead of arriving as a pre-made patty.

The two other Max & Erma’s locations in this region are at Mid Rivers Mall in St. Peters and at the Meadows in Lake Saint Louis.

Goergen and Welkener had another Max & Erma’s downtown in the Drury Plaza, but they closed it last year after its lease came up. The hotel had its own promotion of serving free food and drinks in the evening, Goergan noted.

Last year, Max & Erma’s was acquired by Denver-based American Blue Ribbon Holdings. The restaurant chain had been in the midst of bankruptcy proceedings at the time and was facing double-digit sales declines.

“The company never lost its soul,” said Hazem Ouf, the chief executive of American Blue Ribbon, who is also serving as head of Max & Erma’s. “It just needed to be refocused.”

In less than a year, the company has reversed the sales declines and now has positive single-digit sales, he said.

One of the problems before was that Max & Erma’s over extended itself by moving into new markets it did not have brand recognition in and did not give those restaurants enough support, Ouf said.

So now, he is focusing first on existing markets where the company already has restaurants such as St. Louis, Columbus, and Detroit.

The company has reinvested in the brand with everything from beefed up marketing to new flat screen TVs in the lounge and new employee uniforms.

They have also allowed operators to add more local brews to their on-tap selection in the bar.

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How do you prepare for a financial cataclysm that may not happen?

That’s the question facing investors as an Aug. 2 deadline approaches for Washington to raise the government’s borrowing limit or risk a U.S. default on its debt.

Economists say a default could create a credit crisis similar to what happened after Lehman Brothers went bankrupt in 2008, causing interest rates to rise and harming the economy. But the reaction in the stock and bond markets has been muted.

The Dow Jones industrial average closed at 12,479 last week, about where it stood at the start of the month.

In the bond market, the yield on the 10-year Treasury note stood at 2.89 percent Monday. It was 3.74 percent in Feburary, when almost no one was talking about the debt limit.

In theory, Treasury bonds should have a higher yield when investors think there’s a greater risk they won’t get their money back, such as in the event of a U.S. government default.

So Wall Street appears to think a deal will be struck in time. But the alarming headlines are causing investors anxiety.

“We’re seeing clients growing nervous as they keep hearing about the deadline,” says Oliver Pursche, president of Gary Goldberg Financial Services in Suffern, N.Y. He says investors are asking him whether they need to change to their portfolios.

So what should you do if you’re worried about a default? Here are five things to keep in mind.

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1. Don’t abandon your long-term plan.

Most investors who had diversified portfolios in 2008 and stuck with them have made up their losses, despite a 57 percent drop in the Standard & Poor’s 500 from its peak in October 2007 to the market bottom in March 2009.

Investors who panicked and withdrew their money from the stock market have found it tougher to recover.

“Don’t get waffled around emotionally by all of this short-term noise,” says Michael Farr, chief investment officer of Farr, Miller & Washington, an investment firm in Washington, D.C.

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2. Be wary of bonds.

Conservative investors who sought to avoid the volatility of the stock market and flocked into bonds could get burned.

A default could drive up the cost of government borrowing for years to come and lead to higher interest rates for everyone else. If that happens, bonds would lose value because their prices move in the opposite direction of interest rates.

Even a brief default could be enough to hurt the credit rating of U.S. debt and usher in an era of higher interest rates, cautions Greg McBride, senior financial analyst for Bankrate.com.

If you want to position yourself for an impasse on the debt ceiling, consider Treasury bills with a maturity of six months or less. Look for those maturing sometime after August. Their short-term nature means their prices are less affected by an increase in interest rates. That’s because investors will receive their principal investment before there are larger changes in the economy. Investors should also steer clear of Treasury notes with a maturity of 10 years or longer because their prices may face steep price declines as interest rates climb. Bank CDs are another option, although the yields are minuscule.

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3. Remember that rebalancing can be risky.

Adjusting your 401(k) retirement plan to shift money out of the stock market and into cash is always an option for a nervous investors. But you should weigh the repercussions first.

If you pull money out of stocks now, you could miss a “relief rally” if the market climbs after a last-minute debt deal. Even if you’re correct, and move your money before a decline in the market, you’ll need to get the timing right a second time when you shift back into stocks. Otherwise, there’s a good chance you’ll find yourself on the sidelines when market momentum shifts.

If you have only a year until retirement or you find yourself fretting over your potential losses, playing it cautious may make sense.

“Pull back a little for peace of mind if you’re really worried,” says Tom Root, associate professor of finance and business at Drake University. “But if you have a long-term plan, stay with it.”

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4. Check your emergency preparedness.

In a period of uncertainty, it’s important to make sure you have access to cash in case of an emergency. Investors should set aside money for emergencies in an easily accessible account, like a money-market savings account. It’s important not to have this money in an investment account because market volatility could leave you unprotected.

Ideally, a single-earner family should have enough cash set aside to cover six months or more of living expenses. A two-income family should have at least three to six months’ worth, says Justin Sinnott, a financial consultant for Charles Schwab Corp. in Seattle.

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5. Watch for buying and selling opportunities.

This is a good time to remember Warren Buffett’s famous advice: “Be fearful when others are greedy, and be greedy when others are fearful.” As more fear creeps into the market with the deadline approaching, it may be a prime time to snap up bargain stocks.

And if steep cuts to government spending are part of an agreement on the debt ceiling, keep in mind the specific industries that could be hurt the most.

Goldman Sachs issued a note to investors last week listing companies that generate at least 20 percent of their revenue from government. Many are in the health care sector, both providers and equipment suppliers, plus defense contractors.

The turbulent market in the last three years has caused many investors to be overly cautious, says Erik Davidson, deputy chief investment officer for Wells Fargo Private Bank.

During the debt standoff, he says, investors should look for higher yields. In particular, the stocks of large companies are paying investors an average of 2 percent annually, and high-yield corporate bonds, which are paying an average of 7.26 percent.

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A Samsung unit is raising the ante in a patent dispute with a German rival over energy-saving LED lighting amid intensifying legal disputes among global companies jockeying for supremacy in key consumer technologies.

Samsung LED Co. said Sunday that it has asked the United States International Trade Commission to bar products of Osram GmbH and two units from entering the U.S.

Suwon, South Korea-based Samsung LED said it also filed a lawsuit in a U.S. district court in the state of Delaware alleging infringement of its LED patents, seeking unspecified damages.

Samsung LED is targeting Osram, Osram Opto Semiconductors and Osram Sylvania Inc. in the actions. Munich-based Osram GmbH is a unit of German industrial engineering giant Siemens AG. Osram Sylvania is Osram’s North American operation, based in Danvers, Massachusetts.

Last month, Samsung LED sued Osram Korea Co. and two local companies that sell its products in South Korea in retaliation for what is said were suits by Osram at the USITC, in the Delaware court and in Germany.

“Samsung LED intends to vigorously enforce its intellectual property rights, and these lawsuits reflect Samsung LED’s commitment to that enforcement,” the company said in a release.

Osram could not immediately be reached for comment.

Samsung LED is alleging infringement of eight patents covering what it calls “core” LED technologies used in products such as lighting, automobiles, projectors, mobile phone screens and TVs.

Semiconductor-based LEDs, or light emitting diodes, are becoming increasingly popular for their durability and energy-saving capability.

Samsung LED also suggested it could expand the scope of the USITC case pay day loan lenders.

“As new information becomes available it will continue to evaluate the potential to add additional parties who may be importing, using or selling the accused Osram LEDs in the U.S. market,” the company said in the release.

Samsung LED was established in 2009 as a joint venture between Samsung Electronics Co. and Samsung Electro-Mechanics Co.

Such complaints and lawsuits are common in the global technology industry and seldom lead to market disruptions as disputes take months or years to resolve and typically end with payments of licensing fees rather than any import bans.

Still, they highlight the intensity of competition in which technological advantage can give companies a key edge in attracting consumers.

Rochester, New York-based Eastman Kodak Co. has an ongoing patent dispute over photo technology at the USITC with Apple Inc. of Cupertino, California, and BlackBerry maker Research in Motion Ltd. of Waterloo, Canada.

Samsung companies are taking an aggressive stance in global technology patent wars.

Samsung Electronics is embroiled in multiple complaints and lawsuits with Apple Inc. over smartphone and tablet technology. Separately, Samsung and Taiwan’s AU Optronics Corp. have launched legal actions against each other over alleged patent infringement in liquid crystal displays.

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Associated Press writer Debby Wu in Taipei, Taiwan, contributed to this report.

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Eight of 90 banks have flunked stress tests that project how they would fare in another recession, and 16 more barely passed, Europe’s banking regulator said Friday.

The failing banks should “promptly” take steps to strengthen their financial cushions against losses, the European Banking Authority said as it released the results.

The banks that barely passed may also face pressure to strengthen their finances along with the ones that failed.

The EBA lacks the power, however, to force banks to raise more capital _ whether from investors or governments _ or to make them merge or sell businesses. Only their national governments can do that.

The tests are a key element in fighting Europe’s debt crisis. Officials want to identify weak banks and make them strengthen their finances so they could survive a possible default on government bonds by Greece or another heavily indebted country.

The test, run by national banking regulators, simulated what would happen to bank finances during a recession where growth falls more than 4 percentage points below EU forecasts. For the 17-country eurozone, that would be a drop of 0.5 percent this year and 0.2 percent next year.

Some said the tests were not tough enough because they did not include a scenario in which Greece defaults on its government bonds. That is considered a key risk for Europe’s economy.

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