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These are stories Report on Business is following Wednesday, July 24, 2013.

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Whitney warns on Detroit
With the first hearing today in Detroit's bankruptcy proceedings, the Wall Street analyst who forecast banking troubles in the run-up to the financial crisis is warning of "staggering" aftershocks from the city's collapse.

"There are five more towns like Detroit in Michigan alone," Meredith Whitney writes in today's Financial Times.

"There are many more municipalities across the country in similar positions," she adds.

"Detroit's decision last week paves the way for other elected or non-elected officials to make decisions to save their cities and towns, decisions that probably involve politically unpopular actions that may secure their long-term viability."

Ms. Whitney is well known for having predicted issues at Citigroup in 2007, though later, in the wake of the crisis, she forecast a wave of municipal bond defaults, which never happened.

Still, one wonders what those who shot Ms. Whitney down might think now.

"When U.S. banking analyst Meredith Whitney warned of problems in the $3-trillion U.S. municipal bond market as far back as 2010 she was widely decried by most of Wall Street for being alarmist and had been widely ridiculed for most of the last few years; however nearly three years later her concerns look like being very prophetic," said senior analyst Michael Hewson of CMC Markets in London.

"It's probably no surprise that all those analysts who criticized her then have gone awfully quiet given last week's news over the city of Detroit's finances, and its decision to file for Chapter 9 bankruptcy."

Ms. Whitney is not alone in now citing the pension and debt troubles of other cities in the wake of the biggest municipal bankruptcy in U.S. history, which came last Thursday.

Earlier this week, for example, chief economist David Rosenberg of Gluskin Sheff + Associates warned that Detroit is just the "open act," though he noted that many of the city's issues are unique.

Still, that didn't stop him from citing Chicago as the "next culprit," though he wouldn't make a call on a similar bankruptcy filing, noting only the similarities in the troubles plaguing both cities.

Ms. Whitney, in turn, notes that city bankruptcies have been rare, but things are different now as municipalities struggle to survive.

"As jarring as the reality may be to accept, Detroit's decision last week to declare bankruptcy should not be regarded as a one-off in the U.S. municipal market – which is what the bond-peddlers are now telling their clients," she writes.

"The aftershocks of the largest municipal bankruptcy in U.S. history will be staggering, and Detroit will set important precedents."

At the first hearing in Detroit today, U.S. bankruptcy court Judge Steven Rhodes stayed the legal actions challenging the filing, Reuters reports.

Detroit's collapse is already spilling over into Europe, where some banks are exposed to the city's debt.

CMC's Mr. Hewson wonders how deep this might go.

"It also begs the question as to whether any further strains in the U.S. munibond market spill over into Europe and as a result constrain these banks ability to lend or even function properly, and increase these banks reliance on cheap [European Central Bank], as they attempt to evergreen these toxic assets," Mr. Hewson said today.

"Given the problems we are already experiencing in Europe with zombie banks being reluctant to lend these problems in Detroit could be the start of a bigger problem that could wreak havoc on European regulators and taxpayers for some time to come, not to mention the fact that a constrained banking system is bad for the overall economy, and any potential recovery," he said in a research note.

"It also makes the European banking sector a much more dangerous place for an investor to be especially, if Detroit turns out to be the first of many shoes to drop."

Facebook by the numbers
Shares of Facebook Inc. surged in after-hours action today, up by about 20 per cent at one point, as the social network's second-quarter results topped the estimates of analysts. Here are some highlights:

  • Profit came in at $333-million (U.S.) or 13 cents a share, rebounding from a loss of $157-million or 8 cents a year earlier.
  • Revenue climbed 53 per cent to $1.8-billion from $1.2-billion.
  • Ad revenue rose 61 per cent to $1.6-billion, or 88 per cent of the total. Mobile ad revenue, key for Facebook, accounted for 41 per cent of the advertising total.
  • The number of daily active Facebook users rose 27 per cent to an average 699 million in June. Monthly active users rose by 21 per cent to 1.15 billion. On mobile platforms, monthly average users jumped 51 per cent to 819 million.

"We've made good progress growing our community, deepening engagement and delivering strong financial results, especially on mobile," chief executive officer Mark Zuckerberg said in a statement.

"The work we've done to make mobile the best Facebook experience is showing good results and provides us with a solid foundation for the future."

Apple shares up
Apple Inc. is basking in the glow of better-than-expected quarterly results, its stock on the rise.

As The Globe and Mail's Omar El Akkad reports, the tech giant posted a 22-per-cent decline in third-quarter profit after markets closed yesterday, but still topped the expectations of analysts with earnings of $6.9-billion (U.S.) or $7.47 a share.

Revenue just inched up by just about 1 per cent to $35.3-billion.

Sales of iPhones rose to 31.2 million from 26 million, while those of iPads slipped to 14.6 million from 17 million.

How China fits in
There are interesting tidbits today in the second-quarter financial results of Ford Motor Co. and Caterpillar Inc.

Both cite the impact of China.

Here's what Ford said as it unveiled its second-quarter showing: "Asia Pacific Africa's second-quarter market share was 3.6 per cent, one percentage point higher than a year ago and a quarterly record. The 38-per-cent improvement was driven by China, where Ford's market share improved 1.5 percentage points to a quarterly record of 4.3 per cent, reflecting mainly strong sales of the new Focus, Kuga and EcoSport."

And here's what Caterpillar said: "In addition, our business in China improved – our sales and end-user demand for Cat machines were up in the quarter while the overall construction industry was down."

The comments from the two industrial giants highlights just how important China has become not only to the global economy, but to the companies making gains there. Which is why economic readings from Beijing have played such a role in the ups and downs of the markets.

Over all, Ford posted a jump in profit to $1.2-billion (U.S.) or 30 cents a share, compared to $1-billion or 26 cents a year earlier. Revenue rose to $38.1-billion from $33.3-billion. Ford also boosted its outlook for the year.

It was a weaker showing for Caterpillar, whose profit slipped to $960-million (U.S.) or $1.45 a share from $1.7-billion or $2.54, while revenue declined to $14.6-billion from $17.4-billion.

The company also cut its outlook for the year, now projecting revenue of $56-billion to $58-billion and earnings per share of about $6.50. That's down from an earlier forecast of $57-billion to $61-billion and earnings per share of about $7.

"Overall end-user demand is similar to our previous outlook, but we now expect a more significant reduction in dealer machine inventory," said chief executive officer Doug Oberhelman.

Bombardier delays flight
Bombardier Inc. is once again delaying the first flight of its new C Series airplane, pushing the end-of-July deadline out by a few weeks, The Globe and Mail's Greg Keenan writes.

The aerospace giant said today the aircraft's integration of various systems and parts is progressing well but that "the highly technical last steps are taking more time than initially anticipated to validate the overall systems and ongoing software integration."

Montreal-based Bombardier says the first flight is now scheduled to take place "in the coming weeks."

"While the process has taken more time than we had expected, we are pleased with the result and are very comfortable taking more time to ensure the required integration is finalized and the C Series aircraft is cleared for its first flight," said Mike Arcamone, president of Bombardier Commercial Aircraft.

Dell to boost offer
Founder Michael Dell and his private equity partner are boosting their bid to take the company private by 10 cents a share, provided a key condition is met, raising the offer just hours before a vote.

A meeting scheduled for today to vote on the original proposal, which met opposition, has also been delayed to Aug. 2, the company said today, suggesting the initial did would not have passed muster.

Mr. Dell and Silver Lake said they would hike their cash price to $13.75 (U.S.) a share, calling it "our best and final" bid. But that's contingent on changing the original deal to require approval of a majority of shares by investors who are "present in person or by proxy and voting for or against approval of the merger agreement at the stockholder meeting."

What that means is that shares that are not voted cannot be counted in favour of the opposing forces, which Mr. Dell and Silver Lake said is "fair and reasonable."

"We are not willing to discuss any further increase in the merger consideration nor are we willing to increase the merger consideration to $13.75 per share without the change to the unaffiliated stockholder approval requirement described above," they said.

CP profit surges
Canadian Pacific Railway, the turnaround project of Bill Ackman and Hunter Harrison, posted a hefty jump in second-quarter profit today, despite what it said were troubles caused by the Alberta floods.

The railway, which was targeted by Mr. Ackman, the activist U.S. investor who then put Mr. Harrison at the helm, said second-quarter profit climbed to $252-million or $1.43 a share from $103-million or 60 cents a year earlier.

Revenue rose 10 per cent to $1.5-billion for a quarterly record.

"The second quarter was a significant test for our employees who worked tirelessly during extensive network outages, including more than 40 washouts over a four-day period of historic flooding in Calgary and Southern Alberta," said Mr. Harrison, adding that those troubles ate into revenue growth by some $25-million.

The railway also stuck to its earlier guidance for the year, projecting a "high single-digit" increase in revenue and a gain in earnings per share of more than 40 per cent.

"On balance, we view CP's 2Q13 results as a slight miss as tough weather conditions weighed on results," said Desjardins analyst Benoit Poirier.

Rogers cites regulatory environment
Rogers Communications Inc. came in today with higher profit even as it cited a "heightened level" of regulation in the Canadian telecom sector.

Rogers posted a jump in second-quarter profit to $532-million or 93 cents a share from $400-million or 75 cents a year earlier, The Globe and Mail's Rita Trichur reports.

Revenue climbed 3 per cent to $3.21-billion.

"Despite a heightened level of regulatory activity in the Canadian wireless communications sector, we remain steadfastly focused on the execution of our strategy and the delivery of the most innovative products and reliable service to our customers," said chief executive Nadir Mohamed, referring to a round of new rules in Canada's wireless industry.

Mr. Mohamed also broke his silence on the potential entry of Verizon Communications into Canada, urging the federal government to create a level playing field for all players in the sector.

Loblaw profit climbs
Loblaw Cos. Ltd., the Canadian grocer poised to take over the country's biggest drug store chain, cited an "intense competitive environment" as it posted a gain in second-quarter profit today.

As The Globe and Mail's Bertrand Marotte reports, Loblaw profit jumped to $178-million or 63 cents a share from $156-million or 55 cents in the second quarter of last year.

Revenue increased to $7.5-billion from $7.4-billion.

"The investments we have made to advance our customer proposition once again translated into improved same-store sales performance in an intense competitive environment," said Galen G. Weston, executive chairman of Canada's largest grocery chain, which last week unveiled a blockbuster deal to acquire Shoppers Drug Mart Corp.

Encana, Cenovus report results
Two biggies in Canada's oil patch posted second-quarter results today, one slipping and the other rebounding after several down quarters.

Cenovus Energy Inc. posted a drop in profit to $179-million or 24 cents a share from $397-million or 52 cents a year earlier.

Encana Corp., in turn, rebounded to a profit of $730-million (U.S.) or 99 cents a share, from a loss of $1.48-billion or $2.01 a year earlier, eclipsing the estimates of analysts.

"Our results over the first half of the year have us well-positioned to deliver on our guidance targets for 2013," said Encana chief executive officer Doug Suttles.

"Our focus moving forward is to continue to exercise capital discipline while working to achieve ever greater efficiencies in how we run our business. We expect to see cost savings to materialize throughout the rest of the year as a result of those efforts."

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