SKorea holds navy drill; NKorea scraps sea accord

SEOUL, South Korea – Stung by a surprise underwater attack, South Korea flexed its muscles Thursday with anti-submarine drills and a U.S. general offered strong words of support as the allies sent a clear message to adversary North Korea: Don't try it again.

Pyongyang, however, wasted little time in responding, saying it would launch "immediate physical strikes" against southern ships that enter its waters as tensions spiked further a week after Seoul blamed the North for torpedoing a warship.

Inter-Korean political and economic ties have been steadily deteriorating since the February 2008 inauguration of South Korean President Lee Myung-bak, who vowed a tougher line on the North and its nuclear program. But the sinking of the warship Cheonan and deaths of 46 sailors in March have returned military tensions — and the prospect of armed conflict — to the fore.

Off the South's western coast, 10 warships, including a 3,500-ton destroyer, fired artillery and other naval guns and dropped anti-submarine bombs during a one-day exercise to boost readiness, the navy said.

It was the first such drill since the Cheonan disaster, a navy official said on condition of anonymity, citing department policy.

South Korea also is planning two major joint military drills with the U.S. by July in a display of force intended to deter future aggression by North Korea, according to South Korea's Joint Chiefs of Staff.

Gen. Walter Sharp, chief of the 28,500 American troops in South Korea, said the United States, South Korea and other members of the U.N. Command "will sustain our efforts to deter and defeat aggression."

"We call on North Korea to cease all acts of provocation and to live up with the terms of past agreements, including the armistice agreement," Sharp said Thursday during a Memorial Day speech.

The U.S. fought on the South Korean side during the 1950-53 Korean War, which ended in an armistice, not a peace treaty. North Korea has long demanded a permanent peace agreement.

The North has denied it attacked the Cheonan and says attempts to punish it would lead to war. On Thursday, it announced that in retaliation for the South's moves it would scrap an accord aimed at preventing accidental naval clashes with the South.

The agreement had covered disputed western waters where the Koreas have fought three bloody sea battles and near where the Cheonan sank.

"Immediate physical strikes will be launched" against any South Korean ships that intrude into North Korean waters, the country's military said in a statement, carried by the official Korean Central News Agency.

The prospect of another eruption of serious fighting has been constant on the Korean peninsula since the Korean War ended. But it had been largely out of focus in the past decade as North and South Korea took steps to end enmity and distrust, such as launching joint economic projects and holding two summits.

The sinking of the warship, however, clearly caught South Korea — which has a far more modern and advanced military than its impoverished rival — off guard.

"I think one of the big conclusions that we can draw from this is that, in fact, military readiness in the West Sea had become very lax," said Carl Baker, an expert on Korean military relations at the Pacific Forum CSIS think-tank in Honolulu, calling it nothing short of an "indictment" of Seoul's preparedness there.

Now, South Korean and U.S. militaries are taking pains to warn the North that such an embarrassment will not happen again.

South Korean media reported earlier Thursday that the U.S.-South Korean combined forces command led by Sharp raised its surveillance level, called Watch Condition, up a level from 3 to 2. Level 1 is the highest.

The increased alert level means U.S. spy satellites and U-2 spy planes would intensify their reconnaissance of North Korea, the JoongAng Ilbo newspaper said, citing an unidentified South Korean official.

The South Korean and U.S. militaries would not confirm any reports on changes to the level. If confirmed, it would be the first change since North Korea carried out a nuclear test in May 2009, a South Korean Joint Chiefs of Staff officer said on condition of anonymity, citing department policy.

A South Korean Defense Ministry official said Seoul will "resolutely" deal with the North's measures announced Thursday, though did not elaborate. He spoke on condition of anonymity, citing department policy. South Korea's military said there were no signs of unusual activity by North Korean troops.

Despite the tensions, most analysts feel the prospect of a major war, such as what destroyed the peninsula 60 years ago following an invasion from the North, remains remote as Pyongyang knows what's at stake.

"I don't think they're really interested in going to war," said Daniel Pinkston, a Seoul-based analyst for the International Crisis Group think tank. "Because if it's all-out war, then I'm convinced it would mean the absolute destruction" of North Korea. "And their country would cease to exist."

Toll Brothers takes smaller fiscal 2Q loss

LOS ANGELES – Luxury homebuilder Toll Brothers Inc. posted a narrower loss in its latest quarter and saw a surge in orders for new homes, trends the company said were holding steady despite the end of two homebuyer tax credits.

New home contracts jumped 41 percent in the February-April period and the value of the builder's backlog increased on an annual basis for the first time in four years, reflecting increased confidence among buyers, the company said.

"It appears our business has finally emerged from the tunnel and into a bit of daylight," said Chairman and CEO Robert Toll. He said sales held up in May even though two tax credits expired last month.

Toll said he believes customers are becoming more confident in their job security, their ability to sell previous homes and the outlook for home prices. Toll did sound a cautious note, however, saying he expects a gradual recovery as the market faces headwinds from high unemployment and volatility in the financial markets.

"We don't expect housing to roar back right away," said Toll, who announced last week he will step down from the CEO post on June 16 after more than four decades. He will stay on as chairman.

Builders have seen sales and home orders improve this year thanks to low mortgage rates and homebuyer tax credits. Buyers needed to sign contracts for a home by April 30 and close on their deals by June 30 to qualify for the incentives.

In April, new home sales nationwide jumped 14.8 percent; in March, new home sales posted the biggest monthly increase in 47 years.

Now that the government incentives have expired, many experts project home sales will weaken at least in the near term.

Toll, which is based in Horsham, Pa., and has operations in 20 states, did not benefit as much from the tax credits as some of its competitors because it sells larger and more expensive houses. That also means Toll should suffer less now that the credits have expired.

Deposits from homebuyers in the first three weeks of May were up 23 percent from the same month last year, the company said. The pace at which customers visited Toll's model homes rose 11 percent.

The builder said it signed contracts for 820 homes during the second quarter, an increase of 41 percent from a year earlier and up 56 percent from the first quarter. The builder achieved annual growth in orders despite having 21 percent fewer communities open now than it did a year ago.

Toll's cancellation rate was also the lowest in four years, and Toll said the rate has returned to "historic norms."

Each region recorded improvement. The number of inked contracts in the second quarter jumped 48 percent in the North and South from the previous year. The West saw a 37 percent gain and the Mid-Atlantic logged a 32-percent increase in the number buyers committing to a purchase.

Toll noted that New York City and the suburban corridor from Washington, D.C., to Boston are improving along with parts of California and North Carolina.

The builder has been using sales contests and discounts on some options to help stoke traffic, which has enabled the company to raise prices in some markets.

"We have, for the first time in a long time, some pretty decent pricing power in the New England, Mid-Atlantic corridor," Toll said.

While order trends improved, Toll failed to turn a profit for the 11th consecutive quarter.

The company said it lost $40.4 million, or 24 cents per share, down from $83.2 million, or 52 cents per share. Analysts expected a loss of 23 cents per share, according to Thomson Reuters.

Revenue dropped 22 percent, to $311.3 million from $398.3 million. Analysts expected $321.9 million.

Toll said it wrote down the value of its assets by $42.3 million in the quarter, down from $119.6 million in the second quarter of 2009.

The builder also cut its selling and general spending compared with a year ago.

Toll Brothers shares rose 17 cents to close at $20.78.

Costco 3Q profit rises 46 percent as sales climb

ISSAQUAH, Wash. – Costco Wholesale Corp.'s profit climbed 46 percent in the fiscal third quarter as sales and membership revenue both rose.

The largest U.S. wholesale club operator said Thursday that it earned $306 million, or 68 cents per share. That's up from $210 million, or 48 cents per share, a year ago. Revenue rose 12 percent to $17.78 billion.

Thomson Reuters says analysts expected 66 cents per share and $17.63 billion in revenue for the quarter, which ended May 9.

Revenue from sales rose 12 percent to $17.39 billion, and membership revenue increased 20 percent to $395 million.

The Issaquah, Wash., company said it gained $14 million from a partial reversal of a tax charge. A year ago it paid $34 million to settle a lawsuit.

Costco said revenue from sales at stores open at least a year grew 10 percent. Excluding higher gas prices and changes in currency exchange rates, those sales rose 4 percent. Those sales are considered a key indicator of retailer health because they exclude results from stores that have opened or closed over the past year.

At the end of the quarter, Costco ran 568 warehouses. It has locations in the U.S., Canada, Mexico, the United Kingdom, Korea, Taiwan, Japan, and Australia. Costco said it plans to open five more locations by Aug. 29, the end of its fiscal year.

AP source: Obama extends stop on deepwater wells

WASHINGTON – Escalating his administration's response to the disastrous Gulf oil spill, President Barack Obama plans to announce Thursday that a moratorium on new deepwater oil drilling permits will be continued for six months while a presidential commission investigates, a White House aide said.

Controversial lease sales off the coast of Alaska will be delayed pending the results of the commission's investigation, and lease sales planned in the Western Gulf and off the coast of Virginia will be canceled, the aide said, speaking on condition of anonymity ahead of a midday Obama news conference.

Those steps, along with new oversight and safety standards, are the results of a 30-day safety review of offshore drilling conducted by Interior Secretary Ken Salazar at Obama's direction. Salazar briefed Obama on its conclusions Wednesday night in the Oval Office, the aide said.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

WASHINGTON (AP) — A White House aide says President Barack Obama will continue a moratorium on deepwater offshore drilling for six months while a presidential commission investigates the Gulf oil spill.

Obama on Thursday will also announce delays in drilling off the coasts of Alaska and cancellations of pending lease sales off the Virginia coast and in the Western Gulf.

At a midday news conference, the president will direct new standards and steps to enhance safety, the aide said, speaking on condition of anonymity before the event.

The announcements come after a 30-day safety review of offshore drilling conducted by Interior Secretary Ken Salazar at Obama's direction.