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MARKETWATCH FRONT PAGE

President Barack Obama unveils a $50 billion plan to upgrade the nation’s roads, airports and railways, choosing a Labor Day rally in Milwaukee to announce the administration’s latest proposal to revive the economy.
See full story.

Stocks to watch: Casey’s, Phillips-Van Heusen

Among the companies whose shares are expected to see active trade in Tuesday’s session are Casey’s General Stores Inc., Phillips-Van Heusen Corp., and Flow International Corp. U.S stock markets are closed Monday for the Labor Day holiday.
See full story.

Short week to have some economic impact

Investors will likely focus on consumer credit and jobs in the holiday-shortened week ahead.
See full story.

In charts: What we learned about the economy

A look at the week’s economic indicators, including the smaller-than-forecast decline in nonfarm payrolls in August.
See full story.

July’s trade balance data may unravel mystery

A fresh set of trade data to be released will be eagerly cross-examined by economists after last month’s report proved a cipher.
See full story.

MARKETWATCH COMMENTARY

In the late 1990s, as Silicon Valley’s tech industry headed into boom-land, so too did New York City, writes Therese Poletti.
See full story.

MARKETWATCH PERSONAL FINANCE

In this week’s Realty Q&A, a retiree says his only debt is his $94,000 mortgage, and he wonders whether he should tap his 401(k) to pay off that bill. Lew Sichelman offers some advice.
See full story.

NewsWatch: Obama unveils $50 bln infrastructure plan

By Howard Gold

NEW YORK (MarketWatch) — Mention Old Europe and you’ll probably think of small, cobblestone streets, old buildings, wonderful museums — and stagnant economies.

In fact, “becoming like Europe” is for many Americans the worst possible thing that could happen to our country.

But at least one European nation has been posting astonishing growth numbers, easily outdistancing our own. Its top-notch exports have been booming, especially in China, the world’s dynamo, where its brands are highly desired.

And its unemployment rate, at 7.3% in June, is more than two full percentage points below ours and about in line with that of Canada, our prosperous neighbor to the north.

That country, of course, is Germany, which has bounced back strongly from the global recession and financial market meltdown.

Although problems with its banking system linger — as does the threat of another round of the euro zone’s crisis — Germany’s prowess as an export-oriented manufacturer will leave it in a strong competitive position for years, even as its economic performance becomes more “normal.”

Carsten Brzeski, an economist with ING in Brussels, told the U.K.’s Daily Mail that Germany’s economy was in a “league of its own.”

German GDP grew at 2.2% in the second quarter. In the U.S., that figure was recently revised downward to 1.6%, about halfway between that of Germany and the U.K.’s 1.1%.

So, why is Germany doing so well? A focus on its competitive strengths, a government stimulus program that worked, and the world economy’s big bounce back from the abyss.

Because as good as the second quarter of 2010 was, that was how bad its first quarter of 2009 was. Germany’s GDP plunged 3.5% then, as the world seemed on the verge of another Great Depression.

But the German government swung into action. Germany’s bold plan included a 480 billion euro bailout of German banks, 115 billion euros for troubled companies, and 80 billion euros worth of domestic stimulus.

There were plenty of “bridges to nowhere” in it — millions of euros going to crazy projects like stud farms and a museum of hunting weapons. But two things worked well: Germany’s own “cash for clunkers” plan, which boosted auto sales and helped domestic parts suppliers; and a particularly effective program that encouraged companies to reduce workers’ hours, but not lay them off.

The basis for the “short-time” working system, “has existed in German social legislation for decades,” wrote Der Spiegel.

“When companies experience sharp declines in sales, they are permitted to reduce their employees’ working hours, and the government offsets a portion of the costs. The goal is to avoid layoffs and retain employees until the recession is over.”

The program was wildly successful: It allowed 1.5 million workers to keep their jobs at reduced hours — and continue to spend money — while keeping in place the workforce that would allow companies to gear up quickly once the economy bounced back.

Outside the Box: Germany: Europe’s new superstar

By Andy Xie

BEIJING (Caixin Online) — China’s gross domestic product surpassed Japan in the second quarter of 2010. The international media gave this milestone considerable attention. The domestic media hasn’t paid as much attention.

As natural disasters, environmental degradation and property bubbles take the center of attention, the domestic media isn’t likely to focus on this number. Besides, China has 10.5 times as many people as Japan does. The same GDP still puts China’s per capita income at less than 1/10th of Japan’s, which is hardly a moment to celebrate. Nevertheless, it would be useful to look back on how far China has come, study the risks in China’s future, and, if the country can overcome the existing challenges, how much further the country can go in the next 10 years.

China’s economy took off in 2002: nominal GDP has grown at 18.5%, exports in dollars at 21.7%, and electricity consumption at 12.8% in the following eight years. (I extrapolated the economic performance for the remaining months of 2010.)

In terms of levels, the nominal GDP has increased by 2.9 times, exports by 3.8 times in dollars and 2.9 times in yuan, and electricity consumption by 1.6 times in eight years. Japan had a similar performance in 1960s, Korea and Taiwan in 1980s. But, they were much smaller. What China has done is unprecedented in terms of scale.

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61611

When growth lasts many years, it makes a huge difference over time. It is the miracle of compounding. China and India had about the same value in GDP 20 years go. In 2010 China’s GDP is roughly four times India’s. There is little doubt that China has done many things better than India or most other emerging economies. Otherwise its economy couldn’t be so much bigger in relative terms.

The “Reform and Opening Up” policies have been the center of China’s economic policy in the past three decades. This has undoubtedly been the most important factor. China’s exports have become the largest in the world from virtually nothing three decades ago, and almost nothing two decades ago. In the last decade alone, the exports have risen 5.2 times. Being the workshop of the world has been the most important part of China’s economy so far. Without China’s export success China’s economy wouldn’t be near where it is today.

Joining the World Trade Organization made the critical difference for the country’s export success. It has given multinational companies the confidence to base so much production in China. As China’s domestic market becomes big, it gives MNC’s another powerful reason to keep production in China. No other country could offer the economies of scale from selling locally and exporting abroad, plus low production cost.

China’s production cost is no longer the lowest. Bangladesh’s labor cost is merely one fourth of China’s. Indonesia’s labor cost was twice as high as China’s before 1997. It is now comparable to China’s and is rising slower. Some industries that don’t require the supply chain nearby are likely to leave China. Shoe and garment industries, for example, may move to other countries. But, most other industries will stay in China.

Infrastructure development has been China’s second important competitive advantage. China has continually delivered strong infrastructure development due to the government’s ability to mobilize resources. The state ownership of land and banks are the critical factors. Land and credit are usually the constraints to infrastructure development in most other countries. Without such constraints, China could go for size to achieve economies of scale.

The development of the national expressway system, for example, is a good example. Only an interconnected system of size could deliver economic benefits. A few isolated expressways couldn’t deliver much benefit. This is due to the so-called network effect. In a dozen years, China has completed over 60,000 kilometers of expressways, with another 30,000 under construction. The expressway system has made the national population mobile, integrated villages and small cities into the national economy, and sharply decreased logistics costs.

The development of ports and industrial parks has made it possible for OEM industries to locate in China. Together with the highway system, they have made it possible for China to become the largest export country in the world. Inability to build infrastructure quickly is perhaps the bottleneck in most developing countries. Money is a constraint in that regard but is not the most important. Land acquisition and government implementation capability are the most important barriers.

In addition to traditional infrastructure, China embraced the Internet early, the latest necessary infrastructure for a modern economy. When China decided to embrace Internet in the 1990s, it laid the foundation for China to benefit from and be part of the global economy. It is hard to imagine that China could be where it is without the Internet. If China hadn’t embraced the Internet, its economy today could be only half as big as it is.

Third, China’s large and productive labor force has contributed more than any other factor to China’s growth. Until five years ago, the nominal wage remained stagnant in nominal dollar terms for over a decade, even though labor productivity increased at nearly 10% per annum and total factor productivity at over 4%. Chinese labor’s increased productivity showed up in declining prices for Western consumers, rising profits for multinational companies, and rising tax revenues for the Chinese government. This is why more and more multinational companies have come to China to produce, and Chinese local governments have invested more in infrastructure to attract them.

China’s wages are rising from a low base. Many people are worried about China’s competitiveness. As I mentioned earlier, some shoe and garment manufacturers may move to other countries. Other industries may do so but not without difficulty. And some may stay, but pass the higher cost on to consumers. They need to regurgitate some of the past price reductions. Also, multinational companies may have to accept lower profit margins. The consumer products that China exports retail for 3-4 times the factory-gate prices. There is plenty of room to absorb China’s labor-cost rise.

China’s rapid growth has coincided with a weak dollar. The dollar index peaked in 2002 and has declined by one-third since. The Tiger economies and Southeast Asia had very high growth from the mid-1980s to mid-1990s, which also coincided with dollar weakness. The dollar plunged after the Plaza Accord in 1985. A banking crisis kept it weak into the first half of 1990s. The tech bubble bursting in 2000 was really the trigger for the dollar weakness this time. It slowed capital from flowing into the U.S. The current financial crisis is keeping the dollar weak.

Caixin Online: China’s rapid rise masks some problems

By Ronald D. Orol, MarketWatch

WASHINGTON (MarketWatch) — One of the lesser-known elements of the sweeping Dodd-Frank Act aimed primarily at reforming the nation’s banks is directing the Securities and Exchange Commission to write rules that could temper the compensation of executives across multiple industries.

At issue is a requirement in the statute that directs the SEC to give institutional investors — starting in 2011– a vote on the pay packages of top executives at U.S. corporations. While the vote is non-binding and corporations are not required to follow the wishes of shareholders, the provision is expected to have a transformative impact on the relationship between CEOs and institutional investors, in part, because of the embarrassment a company could experience if investors give its executive pay a strong negative vote.

Fresh & Easy

The pay of Fresh & Easy’s Tim Mason has drawn criticism from investors of U.K. supermarket chain Tesco. Investors may get their chance to vote on executive pay of U.S. companies in 2011.

For the nation’s top chief executives, much is at stake — in 2009, the median total compensation for S&P 500 CEOs was roughly $7.5 million, down from approximately $8.2 million in 2008, according to Equilar Inc., a Redwood City, Calif., based executive compensation research firm.

In addition to a say on pay, the SEC adopted a controversial director election rule Wednesday giving shareholders the power to nominate one or two director candidates onto corporate boards using an inexpensive method.
Read about new director election powers for investors.

Stephen Davis, executive director at the Millstein Center for Corporate Governance at Yale University’s School of Management, argues that institutional investors are likely to use both say-on-pay rules together with new director election powers interchangeably.

“If boards fail to persuade shareholders that the compensation plans they are providing to CEOs are sensible then, going forward, directors could lose their seats to shareholder nominees because they are not being responsive,” Davis said.

John Olson, a partner at Gibson Dunn & Crutcher LLP in Washington, said he expects an antagonistic relationship to emerge between activist shareholder groups and some corporate managers, in part, because there isn’t a consensus in the U.S. as to what are desirable pay practices.

Olson said he expects that over time, pay packages in the U.S. will become homogenized and heavily influenced by standards set by institutional investor groups and proxy advisory companies such as RiskMetrics Group, formerly Institutional Investor Services.

RiskMetrics and a couple other proxy advisory firms are expected to make recommendations to a large chunk of the U.S. institutional investor community about whether to accept a particular pay package.

Temple University professor Steven Balsam said a recommendation by one of the proxy advisory firms against a pay package will drive a massive amount of institutional investors to oppose it as well.

“The proxy advisory companies are going to wield a lot of the power,” Balsam said. “If a company believes that RiskMetrics is going to reject their plan they will go to RiskMetrics, behind-the-scenes, and say, ‘What can we do to get your approval?’”

Gibson’s Olson said that corporate boards will tailor executive pay packages to meet advisory firm standards so they don’t receive negative votes.

Not everyone agrees. Harvard Law School Professor Lucian Bebchuk contends that shareholders understand that compensation packages should differ based on unique expectations at each firm.

However, he argued that there are some compensation arrangements that investors can agree are undesirable and should be removed from all U.S. corporations. A golden parachute pay-package for a CEO that is retained as a top executive by an acquiring firm, is a good example of the kind of compensation provisions that could be removed, he said.

“There are a number of arrangements and features that have been recognized as undesirable, nonetheless they still remain common. The new reality will encourage companies to move away from them,” Bebchuk said.

New ’say on pay’ law could temper CEO pay

By Peter Brimelow, MarketWatch

NEW YORK (MarketWatch) — A brave Baby Boomer bull isn’t broken yet. But he’s getting belligerent.

I called it “the Michael Murphy miracle” when the long-time, market-scarred veteran editor of the tech-oriented New World Investor enjoyed a recent remarkable resurrection. (
See Sept. 10, 2009, column.) Murphy doubled up by calling for a V-shaped economic recovery — which at one point, this may be hard to remember, looked pretty prescient. (
See Jan. 8 column.)

Murphy’s momentum has slowed since then, but overall it’s still impressive. Over the year to date through July, New World Investor is up 1% by Hulbert Financial Digest count, compared to 0.7% for the dividend-reinvested Wilshire 5000 Total Stock Market Index. Not great — but not disastrous either.

And over the past 12 months, New World Investor is up an impressive 47.64%, versus 14.86% for the total return Wilshire 5000. Even better, over the past three years, the letter is up 9.45% annualized against negative 6.23% annualized for the total return Wilshire. And over the past five years, it’s up an annualized 9.81%, as compared to just 0.25% annualized for the total return Wilshire 5000.

But Murphy’s checkered past is evident in the longer run. Over the past 10 years, the letter was down an annualized 5.45%, compared to a (pretty lousy) 0.10% annualized gain for the total return Wilshire 5000.

I don’t see much talk of a V-shaped recovery in Murphy’s recent posts, and he has repeatedly grasped vainly at signs of a market rebound. But he puts his faith squarely on what looks like an extremely unpleasant inflation outlook.

He writes: “Bernanke is watching the 10-year note yield like a hawk. Bernanke has no intention of letting the economy slide into another recession. In an economy that uses a fiat currency issued by their central bank, there is never a reason to take a recession / depression / deflation other than by choice, unless the central bank has lost control in a hyperinflation first.”

“Rule No. 1 of investing is: Don’t Bet Against the Fed! Rule No. 2 is: Don’t Forget Rule No. 1!”

Murphy also puts a lot of effort into analysis of individual tech situations. He wrote recently: “It is a great year for technology, with rapid growth in mobile, cloud computing and social networking. This is a target-rich environment for anyone to find stocks to buy, from Intel Corp.
/quotes/comstock/15*!intc/quotes/nls/intc
(INTC
18.91,
+0.01,
+0.05%)
and Cisco Systems Inc.
/quotes/comstock/15*!csco/quotes/nls/csco
(CSCO
22.23,
+0.01,
+0.05%)
for the giant pension funds, down to QuickLogic Corp.
/quotes/comstock/15*!quik/quotes/nls/quik
(QUIK
3.51,
0.00,
0.00%)
and Towerstream Corp.
/quotes/comstock/15*!twer/quotes/nls/twer
(TWER
1.66,
0.00,
0.00%)
for us. This Fourth Wave of technology growth, as I have labeled it, is happening all over the world. Asia has long since put the recession behind it and is spending tons of money on technology, with lots of it finding its way to the Intels, Ciscos and QuickLogics of the world.”

Somewhat out of character, Murphy has also emerged as a China skeptic — especially interesting to me because I’ve been crabbing about China throughout its great bull market. (
See Feb. 11, 2007, column.)

Murphy wrote recently about Chinese real estate: “The bubble has already burst. The fallout is going to be awesome, especially in a society that values ‘face’ above almost everything else. The speculators can’t sell and can’t pay the loan sharks. The loan sharks not only can’t pay the interest they promised, but the principal is gone.”

“Many Chinese borrowed against the increased value of their houses to flip the proceeds into a loan-shark pool at 30%, and have been living off the income. A schoolteacher who bought a house five years ago and was sitting on a quadruple was awfully tempted to pull out equity and put it into loan-shark pools, where it threw off an annual income three or four times a teacher’s salary. But now the income is gone, their capital is gone, and they owe the bank more than their house is worth in a falling market.”

“It’s not missiles and nukes like Iran, but it could be a bigger deal to the world economy.”

Peter Brimelow: Baby-boomer bull gets belligerent

By Alistair Barr, MarketWatch

SAN FRANCISCO (MarketWatch) — The market for mortgage-backed securities has had a good run this year, but it’s taken a hit in recent days on growing talk of a “mega-refi” program that could let homeowners refinance home loans more easily at lower rates.

On Tuesday, Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co., proposed a refinance program where homeowners with Fannie Mae
/quotes/comstock/11k!fnma
(FNMA
0.36,
-0.01,
-1.88%)
and Freddie Mac
/quotes/comstock/11k!fmcc
(FMCC
0.40,
-0.01,
-1.25%)
fixed mortgages could cut interest rates on their loans from about 6% to current rates well below 5%.

A program like this could provide a stimulus of $50 billion to $60 billion for the U.S. economy, while boosting house prices, Gross said during a conference in Washington, D.C., on the future of the mortgage market.
Read about the conference here.

Speculation about a mega-refi program has been growing. Treasury bond yields have slumped in recent months and mortgage rates have fallen to record lows. But refinance activity hadn’t picked up much until recently. That’s muted the impact of lower rates and sparked discussions of ways to tackle the problem.

A major wave of mortgage refinancing could reduce borrowers’ monthly interest payments, leaving more money in their pockets for spending. That, in turn, could boost economic growth.

However, lots of refis would be bad for mortgage-backed securities investors. That’s because older securities with higher interest rates would be paid off at face value then replaced with newer bonds with lower coupons.

“Bill Gross’s statement in favor of a mega-refi program is probably the major story for mortgage traders,” said Steve Kuhn, who oversees mortgage investments at hedge fund firm Pine River Capital Management LP.

A week ago, Fannie Mae mortgage-backed securities with 6% coupons were trading at 109. These bonds are now trading at about 107 3/4, Kuhn noted.

“The market is more concerned this refi event could happen sometime,” he added in an interview.

Mortgage securities have rallied this year as interest rates fell and refinancing activity remained lackluster.

A mortgage security with a 6% coupon looks more attractive as yields on comparable bonds drop. With access to cheap borrowing, mortgage traders have been able to buy these mortgage securities and generate healthy returns.

“A 6% yield looks very good and you can get funding at LIBOR in the mortgage market and buy that. The trade could earn almost 6% a year in theory, partly because funding costs are so low,” Kuhn said.

An index of hedge funds that trade mortgages jumped more than 12% in the first seven months of 2010, making it the best-performing strategy so far this year, according to HedgeFund.net. The average hedge fund tracked by HedgeFund.net is up less than 2% in the same period.

But if a lot of refinancing happens, investors who paid 109 for a mortgage bond with a 6% coupon would in theory be repaid at par, or 100.

“Investors could lose as much as 9 percentage points if everyone refinanced very quickly,” Kuhn said.

The mortgage market is currently pricing in about a 20% chance that a mega-refi program happens, he added.

If a plan is unveiled, it would probably take about six months to get going. So investors may still be willing to pay about 103 for Fannie and Freddie mortgage securities with 6% coupons, Kuhn explained.

With funding costs close to zero, investors would be able to make about 3 percentage points over half a year. Then the refis would kick in and investors would be repaid at par, or 100.

Alistair Barr is a reporter for MarketWatch in San Francisco.

Credit Markets: Mortgage market knocked by ‘mega-refi’ talk

By Carla Mozee, MarketWatch

LOS ANGELES (MarketWatch) — Major Latin American stock markets closed higher Friday, finding some relief after a tough week that ended in losses in the wake of heightened fears that global growth is slowing at a faster pace than had been anticipated.

Key stock indexes in Brazil, Mexico, Chile and Argentina posted daily gains ranging from 0.1% to 1.8%.

But for the week, Brazil’s Bovespa fell 2.7%, its first loss since the week ended June 2. Mexico’s IPC fell 2.5%, its second loss in three weeks.

Argentina’s Merval fell 2.4%, its first loss since the week ended July 16, and Chile’s IPSA slipped less than 1 point, but the loss was enough to notch its first weekly loss since June 2.

The declines followed a spate of worrisome developments internationally this week, including Tuesday’s decision by the U.S. Federal Reserve to rollover debt back into the Treasury market as it sees more modest growth for the rest of the year.

In addition to the Fed’s downgrade of the pace of recovery, the Bank of England this week lowered its outlook on U.K. growth, and a July slowdown in imports in China raised concerns about slowing in a key market, particularly for commodities.

A four-week streak of inflows to Latin American equity funds was snapped this week, according to fund tracker EPFR in a note on Friday.

“Doubts about the strength of U.S. and Chinese demand for commodities and other exports drove the outflows from Latin America Equity Funds, with Mexico Equity Funds again hit hard, although Brazil and Colombia Equity Funds did manage to attract modest amounts of new money,” wrote Brad Durham, managing director at EPFR.

Trading action

On Friday in Sao Paulo, the Bovespa rose 0.5% to 66,264.43.

Shares of Tam
/quotes/comstock/13*!tam/quotes/nls/tam
(TAM
16.69,
+0.66,
+4.12%)
staged a dramatic turnaround in Sao Paulo, rising 27.6% to 36.20 reals ($20.42) after the company and Chile’s Lan Airlines said they are in talks to combine operations, which could create the largest airline operator in South America.
Read more about the potential combination.

Shares of rival airline operator Gol
/quotes/comstock/13*!gol/quotes/nls/gol
(GOL
13.90,
+0.54,
+4.04%)
jumped 11% and Santiago-traded shares of Lan
/quotes/comstock/13*!lfl/quotes/nls/lfl
(LFL
27.20,
+2.16,
+8.63%)
climbed 7.7%.

Tam shares during the session had led decliners on the Bovespa after the airline operator late Thursday swung to a second-quarter loss of 154.1 million reals for the most recent period. A year ago, Brazil’s biggest air carrier earned 555.1 million reals.

Tam said operational expenses rose 6.3%, largely because of higher fuel expenses. Fuel costs rose nearly 37% to 847 million reals from the year-ago.

Also up were shares of oil giant Petrobras
/quotes/comstock/13*!pbr/quotes/nls/pbr
(PBR
35.87,
+0.14,
+0.39%)
. They rose 0.5% ahead of their quarterly results.

Late Friday, Petrobras said its second-quarter net income rose to 8.29 billion reals ($4.68 billion), up from 8.16 billion reals a year ago. Net operating revenue rose to 53.6 billion reals from 44.6 billion reals a year ago.

Home builders as a group rose 2.1% in Sao Paulo, with a 3.7% jump in Rossi Residencial shares and a 3.7% rise in PDG Realty
/quotes/comstock/11i!pdgr.y
(PDGRY
19.56,
-0.67,
-3.31%)
.

Shares of OGX Petroleo e Gas Participacoes
/quotes/comstock/11i!ogxp.y
(OGXPY
10.90,
+0.32,
+3.02%)
gained 2.3%, adding to gains on Thursday after the company said it made a hydrocarbon find onshore of the Parnaiba basin, and, separately, said it swung to a second-quarter profit of 57.8 million reals.

Chile’s IPSA climbed 1.8% to 4,462.24, bolstered in part by the surge in Lan’s shares.

Late Thursday, Chile’s central bank raised its key interest rate by 50 basis points to 2%, meeting market expectations. The move marked the third consecutive rate hike by monetary policy makers.

Mexico’s IPC rose 0.2% to 32,099.75, but the gain was limited in part by declines in retailer Wal-Mart de Mexico
/quotes/comstock/11i!wmmvy
(WMMVY
23.20,
-0.02,
-0.09%)
, down 0.2%, and cement maker Cemex
/quotes/comstock/13*!cx/quotes/nls/cx
(CX
8.61,
-0.15,
-1.71%)
, down 1.8%.

Argentina’s Merval eked out a gain of 0.1% to 2,367.98.

Carla Mozee is a reporter for MarketWatch, based in Los Angeles.

Latin American Markets: Brazil stocks rise, but weekly loss intact

By Polya Lesova, MarketWatch

FRANKFURT (MarketWatch) — Utility giant RWE AG warned Thursday it will have to review its medium-term goals because of the German government’s plans to introduce a nuclear-fuel tax.

The firm reported an 8% decline in first-half net profit, but operating earnings grew 21% and it confirmed its full-year forecasts.

RWE will reassess its goals through 2013 given “growing political risks and burdens.”

“Such a [nuclear-fuel] tax would substantially diminish our earnings power — and thus our financial scope for investment in renewables, low-carbon power stations and smart grids,” said Chief Executive Juergen Grossmann in a statement.

He also said that officials have promised to make clear statements about the future of nuclear energy in Germany.

“This is urgently needed for our long-term investment plans,” Grossmann said.

For the six months through June, RWE
/quotes/comstock/11e!frwe
(DE:RWE
54.15,
-0.10,
-0.18%)
posted net profit of 2.04 billion euros ($2.63 billion), down from €2.22 billion in the same period a year ago.

Operating profit rose 21% to €4.96 billion from €4.08 billion. Analysts polled by Dow Jones Newswires expected net profit of €2.33 billion and operating profit of €4.56 billion.

Revenue increased 12% to €27.35 billion, exceeding expectations of €26.14 billion. In the first half, electricity sales rose by 8% and gas sales surged 37%.

RWE reiterated that its still expects approximately 5% growth in its operating result in fiscal 2010.

“This means our shareholders can continue to look forward to another attractive dividend,” Grossmann said.

On Wednesday, rival E.ON AG
/quotes/comstock/11e!feoan
(DE:EOAN
23.18,
+0.06,
+0.26%)
reported a 9% drop in first-half net profit and confirmed its full-year earnings guidance.

E.ON also expressed concern over the policy debate in Germany, saying the nation needs “a non-ideological, technology-neutral and market-based energy strategy that includes an environmentally and economically sensible decision on the future of nuclear energy.”

Shares of both RWE and E.On have dropped around 20% so far this year.

Polya Lesova is MarketWatch’s London bureau chief.

RWE warns on nuclear-tax impact, net profit slips