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Dollar Fear Trumps Greed in Guarding Against Rebound (Update2)
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By Liz Capo McCormick
Dec. 7 (Bloomberg) -- Traders in the $3.2-trillion-a-day foreign-exchange market are paying the highest prices in more than a year to protect against a sudden rebound in the dollar after its worst annual performance since 2003.
That possibility may be less remote, according to Bill Gross, manager of the world’s biggest bond fund, who says a prolonged period of record-low interest rates may foster the “systemic risk” of new asset bubbles. Dubai’s effort to delay debt repayments reminded traders how the U.S. Dollar Index surged 16 percent in the two months after the September 2008 collapse of Lehman Brothers Holdings Inc. when investors sought a haven from the turmoil and poured money into U.S. assets.
“American investors have a lot of exposure now to foreign markets,” said Mansoor Mohi-uddin, the chief currency strategist at Zurich-based UBS AG, the largest foreign-exchange trader behind Deutsche Bank AG as measured by Euromoney Institutional Investor Plc. “If investors become risk-averse again, which happened last year due to Lehman’s bankruptcy and could happen now for a whole host of reasons, they are likely to go into less risky assets like U.S. Treasuries, which would help the dollar.”
While Intercontinental Exchange Inc.’s Dollar Index fell to a 16-month low last month, implied volatility on three-month call options granting the right to buy the greenback versus the euro exceeded that for options to sell it by 1.61 percentage points. The Dollar Index tracks the currency against the euro, yen, U.K. pound, Canadian dollar, Swiss franc and Swedish krona.
Risk-Reversal Rates
The so-called 25-delta risk-reversal rate, which was flat as recently as October, hasn’t shown such high relative demand for dollar calls since hitting a record 2.595 percentage points in November 2008. When the implied volatility of dollar calls exceeds puts, like now, the gap is expressed as a negative number, which would be minus 2.595 percentage points.
Investors are waiting for “the BOB event, a bolt out of the blue,” said John Alkire, the chief investment officer at Morgan Stanley Asset & Investment Trust Management in Tokyo. “The world had a mini-BOB,” when financial markets tumbled after Dubai announced plans to restructure some of its $59 billion in debt, said Alkire, who helps oversee $40 billion.
The Dollar Index had its biggest two-day gain in a month on Nov. 26-27, rising 1 percent, as Dubai’s proposal to delay debt payments shook investor confidence by risking the biggest sovereign default since Argentina’s in 2001.
It surged 1.7 percent on Dec. 4, the most since Jan. 20, after the Labor Department said employers cut the fewest jobs in November since the recession began. The Dollar Index was at 75.959 as of 10:51 a.m. in London, from 75.911 in New York late last week.
Double-Dip
Besides the financial turmoil in the United Arab Emirates, investors are also wary of the global economy falling back into recession with U.S. unemployment above 10 percent for the first time since 1983, non-performing U.S. commercial mortgage loans as measured by Moody’s Investors Service rising to 8.3 percent and the potential for stocks to fall after the steepest rally in the Standard & Poor’s 500 Index since the 1930s.
International Monetary Fund Managing Director Dominique Strauss-Kahn said on Nov. 23 that about half of bank losses from the global financial crisis have yet to be reported. The IMF said in September that banks, which have taken $1.72 trillion in losses and writedowns as measured by Bloomberg since the start of 2007, may have $1.5 trillion in toxic debt on their books.
“When viewed from 30,000 feet, there is even a systemic risk that new asset bubbles are in the formative stage,” Gross, the co-chief investment officer of Pacific Investment Management Co., wrote in his December investment outlook posted on the Newport Beach, California-based company’s Web site Nov. 19.
High Stakes
It’s not only currency traders that are concerned about a reversal in markets.
Forecasts for the fastest U.S. earnings growth in 15 years are failing to convince equity traders that the S&P 500 will extend its rally. S&P 500 options to protect against declines in stocks over the next year cost 40 percent more than one-month contracts, the biggest premium since 1999, data compiled by Barclays Plc and Bloomberg show.
Record-low interest rates in the U.S. have encouraged investors to borrow in U.S. dollars and reinvest the proceeds in countries with higher ones, such as Australia and New Zealand. The so-called carry trades, which contribute to weakness in the dollar, produced returns of about 50 percent over the past nine months, Bloomberg data show.
Rising Volatility
U.S. mutual fund investors raised the percentage of foreign assets in their holdings to 25.9 percent in October, matching the peak reached in mid-2008, based on Investment Company Institute data tracked by UBS. During the financial crisis, the percentage fell to 23 percent, after more than doubling from 2002.
The dollar has depreciated 6.2 percent against the euro this year, 23 percent versus Australia’s currency and 19 percent versus the New Zealand dollar.
Investors are buying options to protect their positions “given that recent moves in the exchange rate have been nasty on the downside,” said Neil Jones, head of European hedge-fund sales in London at Mizuho Corporate Bank Ltd. “Investors bullish on the euro are prepared to pay a premium for the automatic stop-loss the options provide while also keeping their cash position in play.”
JPMorgan Chase & Co.’s G7 Volatility Index rose to 14.43 last month from the low this year of 12.32 in September. The 10- year average before the 2008 credit crunch was 9.9 percent.
No Policy Change
Strategists are cutting their forecasts for the greenback. The dollar will depreciate to $1.55 against the euro by March from $1.49 last week, and to $1.62 by June, according to JPMorgan. Since September, the median June 2010 estimate for Australia’s dollar has risen to 94 U.S. cents from 85, and jumped to 74 U.S. cents from 67 for New Zealand’s currency.
Any flight to the dollar may prove short-lived, with the Federal Reserve signaling it will keep rates at a range of zero to 0.25 percent for an extended period, according to Axel Merk, president of Palo Alto, California-based Merk Investments LLC.
“If Dubai signals one thing, it’s that the odds of the central bank policy makers around the world mopping up all the liquidity they’ve provided anytime soon may be rather low,” said Merk, who manages more than $550 million in mutual funds that specialize in currencies.
Dollar bears also say the U.S. government shows little concern about the currency’s decline, paving the way for further depreciation. That’s because a weaker greenback has helped to bolster exporter earnings. U.S. exports increased for the last five months, the Commerce Department said Nov. 13.
Undue Speculation
The depreciating dollar is proving no deterrent to demand for U.S. financial assets. For every $1 of debt sold by the Treasury this year, investors put in bids for $2.59, up from $2.19 at this point in 2008.
Traders pushed up the cost to protect against a rise in the dollar after Fed policy makers said last month that their decision to cut rates to zero may be fueling undue financial- market speculation.
Its policy of keeping rates low might cause “excessive risk-taking” or an “unanchoring of inflation expectations,” according to minutes of the Nov. 3-4 Federal Open Market Committee meeting. The committee members also said the dollar’s decline has been “orderly.”
Nouriel Roubini, the New York University professor who predicted the financial crisis, said last week that Dubai’s attempt to reschedule debt underscores the global economy’s vulnerability to a setback.
‘Vulnerabilities’ Remain
“Although Dubai World’s financing issues are not a surprise and are relatively small given global credit losses, they are a reminder that the vulnerabilities and imbalances that contributed to the credit crunch have not disappeared,” Roubini said on his RGE Web site on Dec. 2.
The three-month risk reversal rate for options on the Australia-U.S. dollar exchange rate reached minus 3.57 percent on Nov. 27, the most since February. On the same day the New Zealand-U.S. dollar exchange rate, it hit minus 3.92 percent, the biggest negative since February.
“People saved money in the past by not insuring themselves, which proved to not be a great trade,” said Nick Parsons, head of markets strategy in London at NabCapital, a unit of National Australia Bank Ltd., the country’s largest bank by assets. “There is plenty of incentive and opportunity to hedge now. People are much more willing to buy insurance.”
To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net.
Last Updated: December 7, 2009 06:24 EST
Gold Can’t Beat Checking Accounts 30 Years After Peak (Update1)
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By Nicholas Larkin and Millie Munshi
Dec. 7 (Bloomberg) -- Gold’s best year in three decades has yet to match the returns of an interest-bearing checking account for anyone who bought the most malleable of metals coveted for at least 5,000 years during the last peak in January, 1980.
Investors who paid $850 an ounce back then earned 44 percent as gold reached a record $1,226.56 on Dec. 3 in London. The Standard & Poor’s 500 stock index produced a 22-fold return with dividends reinvested, Treasuries rose 11-fold and cash in the average U.S. checking account rose at least 92 percent. On an inflation-adjusted basis, gold investors are still 79 percent away from getting their money back.
“You give up a lot of return for the privilege of sleeping well at night,” said James Paulsen, who oversees about $375 billion as chief investment strategist at Wells Capital Management in Minneapolis. “If the world falls into an abyss, gold could be a store of value. There is some merit in that, but you can end up holding too much gold waiting for the world to end. From my experience, the world has not ended yet.”
While gold’s nine-year bull market is attracting hedge-fund managers John Paulson, Paul Tudor Jones and David Einhorn, strategists and fund managers at Barclays Plc, HSBC Holdings Plc, SCM Advisors LLC and Brinker Capital Inc. say buy-and-hold investors shouldn’t always own bullion. The accumulation of gold is part of a record $60 billion Barclays estimates will flow into commodities this year.
Hoarding Bullion
The SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, has amassed more metal than Switzerland’s central bank, spurred by a plunging dollar and concern that the at least $12 trillion of government spending to lift economies out of the worst global recession since World War II will spur inflation. The collapse of U.S. real estate in 2007 froze credit markets and left the world’s biggest financial companies with $1.72 trillion of losses and writedowns, data compiled by Bloomberg show.
The U.S. Mint suspended production last month of some American Eagle coins made from precious metals because of depleted inventories. The U.K.’s Royal Mint more than quadrupled production of gold coins in the third quarter. Harrods Ltd., the London department store, began selling gold bars and coins for the first time in October.
Those sales contributed to a 30 percent rally in gold this year, beating the 25 percent gain in the S&P 500, with dividends reinvested, and a 2.4 percent drop in Treasuries. Investors bought gold as the U.S. economy, the world’s biggest, shrank 3.8 percent in the 12 months ended in June, the worst performance in seven decades. Gross domestic product expanded at a 2.8 percent annual rate in the third quarter.
Longest Winning Streak
A weakening dollar also contributed to bullion’s longest winning streak since at least 1948. The U.S. Dollar Index, a measure against six counterparts, dropped in six of the last eight years, including a 6.6 percent decline in 2009, bolstering demand for a hedge. Gold fell 1.6 percent to $1,143 an ounce by 11:08 a.m. in London. Before today, the metal had risen 32 percent this year, the most since 1979.
Buy-and-hold investors may not have done so well. One dollar put into a U.S. checking account in 1983 would be worth at least $1.92 today, based on annual average interest rates from Bankrate.com. The Federal Reserve target rate from 1980 to 1982 was 8.5 percent to 20 percent. Banks were paying 5 percent on the accounts in January 1981, according to a report in the New York Times.
Dividends Reinvested
The S&P 500 returned 2,182 percent from the beginning of 1980 through the end of the third quarter this year, according to data compiled by Bloomberg. The calculation assumes dividends reinvested on a gross basis. Treasuries returned 1,089 percent through the beginning of this month, according to Merrill Lynch’s Treasury Master Index.
“Gold is a useless asset to hold long term,” said Charles Morris, who manages more than $2 billion at HSBC Global Asset Management’s Absolute Return fund in London. “I’m not a gold bug who believes that you want to own this thing in your portfolio at all times. We should own it when the going is good, and the going right now is great.”
Those who bought gold when it reached a two-decade low of $251.95 in August 1999 have seen a 387 percent return, more than four times the 82 percent gain in Treasuries. An investment in the S&P 500 lost 0.4 percent through the end of last month. Interest on checking accounts shrank to 0.14 percent this year from 0.89 percent in 1999.
Since the S&P 500 peaked in October 2007, investors in the index lost 25 percent, holders of Treasuries made 16 percent and gold buyers are up 64 percent.
‘Very Conservative Investments’
“There are people that just stayed in very conservative investments in cash and government bonds,” said Larry Hatheway, global head of asset allocation at UBS AG in London, who recommends investors hold about 1 percent of their assets in bullion. “Surely they would have been a lot better off being in gold.”
Buying bullion at $35 when U.S. President Richard Nixon abandoned the gold standard in 1971 would have given a 35-fold return, about the same performance as the S&P 500.
Gold will average $1,070 next year, according to the median in a Bloomberg survey of 19 analysts. The metal may jump to $2,000 in the next five years, said HSBC’s Morris. Ian Henderson, manager of $5 billion at JPMorgan Chase & Co., said he’s adding to his gold-related holdings because of “the momentum behind it.” Jim Rogers, the investor who predicted the start of the commodities rally in 1999, has said bullion will surge to at least $2,000 over the next decade.
Touradji Capital
“Our sense is that this bubble is more at the beginning stages than on the brink of collapse,” said Thomas Wilson, head of the institutional and private client group at Brinker Capital in Berwyn, Pennsylvania, which manages about $8.5 billion.
Touradji Capital Management LP, the New York hedge fund founded by Paul Touradji, bought 2.23 million shares of Barrick Gold Corp., the world’s biggest producer, during the third quarter, according to a Nov. 13 filing with regulators. The stake, Touradji’s biggest equity holding, is worth $95 million.
Paulson & Co., the hedge-fund firm run by billionaire Paulson, will start a gold fund on Jan. 1 investing in mining companies and bullion-related derivatives, according to a person familiar with the plan. Einhorn, who runs New York-based Greenlight Capital Inc., told a presentation in New York in October that he’s buying gold to bet against the dollar.
Paul Tudor Jones, in an Oct. 15 letter to clients of his Tudor Investment Corp., said gold is “just an asset that, like everything else in life, has its time and place. And now is that time.”
Net Gold Buyers
Central banks will become net buyers of gold this year for the first time since 1988, according to New York-based researcher CPM Group. India, China, Russia, Sri Lanka and Mauritius have all added to their reserves.
Gold should be held when governments cease to function and currencies are worthless, or when inflation is surging, said Brian Nick, a New York-based investment strategist at Barclays Wealth, which manages $221 billion. He doesn’t recommend increasing gold holdings, which are a “very small” part of commodity allocations.
Inflation has yet to accelerate. U.S. consumer prices will rise 2 percent next year, the smallest expansion since 2002, according to the median estimate of 63 economists surveyed by Bloomberg. Prices will shrink 0.4 percent this year.
‘Knee-Jerk Reaction’
“People have this knee-jerk reaction and say that you want gold as a hedge against inflation,” said Maxwell Bublitz, who helps oversee $3.5 billion as the chief strategist at San Francisco-based SCM Advisors LLC and recommends investors hold no more than 5 percent of their assets in the metal. “But the history of gold in regard to inflation shows that it’s not a great hedge.”
Investors seeking to protect themselves against inflation should buy commodities, which are cheaper than gold, said Wells Capital’s Paulsen. Copper, after more than doubling this year, is still 28 percent away from the record $8,940 a metric ton reached in July 2008.
“Theoretically, it does have a spot in portfolios, a small one,” Bublitz said. “You’re probably going to get entry points that are a lot better than where gold is now.”
To contact the reporters on this story: Nicholas Larkin at nlarkin1@bloomberg.net; Millie Munshi in New York at mmunshi@bloomberg.net.
Last Updated: December 7, 2009 06:48 EST
Treasury Said to Link Citigroup Sale to TARP Payback (Update1)
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By Bradley Keoun
Dec. 7 (Bloomberg) -- The U.S. Treasury Department aims to hold off on selling its 34 percent stake in Citigroup Inc. until the bank and regulators agree on a broader plan to repay all obligations remaining from last year’s $45 billion government bailout, a person close to the department said.
Treasury officials are concerned that a sale now of its 7.7 billion shares in the New York-based bank may weaken investor demand should Citigroup subsequently be required to raise capital as a condition of exiting the bailout program, said the person, who declined to be identified because the government hasn’t publicly discussed the plans.
Citigroup executives have pressed Treasury for at least three months to sell the stake as a first step toward leaving the bailout program, according to people familiar with the matter. They want to escape government-imposed pay limits that may make the company vulnerable to employee-poaching by unfettered rivals. Bank of America Corp., the only other large U.S. bank under pay limits, last week announced a plan to exit the program.
“This should be well thought-out for the benefit of all constituencies, and in this case that includes shareholders, the government and the taxpayers,” said Dennis Santiago, chief executive officer of analysis firm Institutional Risk Analytics in Torrance, California. “Just because Bank of America goes doesn’t mean you have to rush Citigroup.”
Kuwaiti Sale
The Kuwait Investment Authority, the Gulf nation’s sovereign-wealth fund, said yesterday it sold its stake in Citigroup for $4.1 billion, earning a $1.1 billion profit.
Citigroup shares fell to $4.00 in European trading today, down 1.5 percent from their $4.06 close in New York trading on Dec. 4. The shares have tumbled 47 percent this year, paring Citigroup’s market value to about $92 billion.
The government is trying to wind down bailout programs extended as financial markets convulsed late last year. Treasury Secretary Timothy Geithner said in a Dec. 4 interview that most taxpayer money injected into banks through the Troubled Asset Relief Program will eventually be recovered.
While holding off on a sale of its Citigroup stake, the Treasury has pushed regulators behind the scenes to accelerate discussions with all large banks about their plans to exit TARP, the person close to the department said.
Commercial Property
Mounting defaults on commercial property may keep regional lenders from repaying bailout funds until at least 2011. Unpaid loans on malls, hotels, apartments and home developments stood at a 16-year high of 3.4 percent in the third quarter and may reach 5.3 percent in two years, according to Real Estate Econometrics LLC, a property research firm in New York.
That’s a bigger threat to regional banks, which are almost four times more concentrated in commercial property loans than the nation’s biggest lenders, according to data compiled by Bloomberg on bailout recipients. The concentration makes regulators less likely to let regional lenders like Synovus Financial Corp. and Zions Bancorporation leave the Troubled Asset Relief Program, analysts said.
In November, the Federal Reserve asked nine of the biggest U.S. banks to submit plans to repay the government’s capital injections. In testimony last week before the Senate Banking Committee in Washington, Federal Reserve Chairman Ben S. Bernanke said Bank of America got approval to exit TARP only after regulators “felt it was safe and reasonable and appropriate.”
Charlotte, North Carolina-based Bank of America, the biggest U.S. lender, agreed to raise at least $18.8 billion of capital, according to a Dec. 2 press release. It said later that it had raised $19.3 billion.
Free to Sell
JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley, all based in New York, repaid their bailout funds in June. San Francisco-based Wells Fargo & Co., which still has $25 billion of TARP money, isn’t subject to pay limits because it never needed a second helping of bailout funds, as Citigroup and Bank of America did.
In October, Citigroup CEO Vikram Pandit, 52, said he was “focused on repaying TARP as soon as possible.” He said, “We’re going to do so in consultation with the government and our regulators.” At least twice since September, he has said the Treasury is free to sell its shares at any time.
The Treasury got the shares in September, when $25 billion of the bailout funds were converted into common stock. The shares are now worth $31.2 billion, based on the closing price on Dec. 4, giving Treasury a paper profit of more than $6 billion.
Kuwait, Singapore
The Kuwait investment fund that got about 900 million shares in a related preferred-stock conversion last year yesterday converted them before selling the stock. In September, a Singapore government fund that got about 2.1 billion shares in the conversion said it had used open-market sales to reduce the stake to less than 1.14 billion shares.
The U.S. government doesn’t want to be viewed as trying to time the market, so part of Citigroup’s TARP exit plan would include a formal process for disposing of the common stake, the person said. Even if Treasury sold now at a profit, it might be second-guessed later if the shares rose further, the person close to the department said.
“We don’t comment on individual banks but are committed to maximizing returns on bank investments and restoring stability at the least possible cost to taxpayer,” Treasury spokesman Andrew Williams said.
Citigroup spokesman Jon Diat declined to comment on the Treasury’s plans or the bank’s timeline for repaying TARP funds.
Asset Guarantees
Citigroup’s discussions with banking regulators over a TARP exit may gain momentum now that Bank of America’s plan is set and regulators focus on Citigroup, the person close to Treasury said. The bank’s regulators, which include the Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., haven’t commented on when the bank might be allowed to exit.
Citigroup still has $20 billion in bailout funds along with guarantees from the Treasury, FDIC and Federal Reserve on $301 billion of devalued securities, mortgages, auto loans, commercial real estate and other assets. Citigroup paid $7 billion in advance for the guarantees, which last five to 10 years, depending on the type of underlying assets.
The lender’s exit plan may be more complicated than Bank of America’s because the government must decide how to handle the Treasury’s common stake and what to do about the asset guarantees, the person close to the department said.
To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net.
Last Updated: December 7, 2009 04:08 EST
Yen, Dollar Rise on Rate Outlook; Stocks, Commodities Decline
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By Justin Carrigan
Dec. 7 (Bloomberg) -- The yen strengthened and the dollar rose to its highest level in a month against the euro as investors weighed whether the world economy is recovering fast enough to warrant higher central bank interest rates. U.S. stock index futures and commodities fell.
The yen advanced against all 16 most-traded currencies tracked by Bloomberg as of 8:14 a.m. in New York. The dollar gained versus 15. The MSCI Emerging Markets Index dropped the most in six days, losing as much as 0.8 percent. Dubai’s equity index plunged 5.8 percent to a four-month low. The Dow Jones Stoxx 600 Index of European companies sank 0.6 percent. Futures on the Standard & Poor’s 500 Index slipped 0.3 percent, while gold fell for a third day.
Federal Reserve Chairman Ben Bernanke speaks today for the first time since the Dec. 4 U.S. employment report signaled a surprise drop in the jobless rate, stoking expectations the Fed may raise rates sooner than economists had anticipated. Investors are concerned banks may have to increase writedowns that have reached $1.7 trillion worldwide since the credit crunch began, as Dubai World seeks to delay payment on $26 billion of debt.
“On the U.S. dollar front we now have an early indication on the level of volatility that a shift in monetary policy can trigger,” Khurram Butt, in the Treasury sales division of Europe Arab Bank Plc in London, wrote in a client note. “Before the job report, the chances of a June Federal Reserve rate hike was implied at only 35 percent, but this jumped to above 50 percent after the unemployment number came out.”
Yen, Dollar Gain
The yen rose most against higher-yielding currencies, advancing 1.5 percent versus the New Zealand dollar. The U.S. dollar traded at its highest level since Nov. 4 versus the euro, extending gains made at the end of last week that followed the U.S. employment report.
The U.S. lost 11,000 jobs in November, less than the 125,000 median forecast of 82 economists in a Bloomberg survey, the Labor Department said Dec. 4. Fed-funds futures contracts on the Chicago Board of Trade showed today a 16 percent probability the central bank will increase its benchmark overnight rate to at least 0.5 percent by March, up from 11 percent a week ago.
The MSCI World Index of 23 developed nations’ stocks retreated 0.4 percent. The MSCI Asia Pacific Index rose 0.1 percent as the region’s exporters increased. Canon Inc., the world’s largest maker of cameras, added 3.3 percent in Tokyo. Billabong International Ltd., a clothing maker that generates more than half its sales in the Americas, added 4.9 percent in Sydney.
Futures Fall
Fresnillo Plc, the world’s largest primary silver producer, and Xstrata Plc led basic-resources producers lower in London, each sinking 2.1 percent. Siemens AG, Europe’s biggest engineering company, slipped 2.1 percent in Frankfurt after Morgan Stanley cut its recommendation on the shares.
The decline in U.S. stock-index futures indicated the S&P 500 may retreat from last week’s advance. The Fed on Nov. 4 pledged to keep its benchmark overnight lending rate near zero for an “extended period.” The jobs report showed the unemployment rate unexpectedly dropped to 10 percent from 10.2 percent in November.
The Dubai Financial Market General Index sank the most among benchmark equity indexes worldwide. The measure has tumbled 17 percent since Dubai announced on Nov. 25 that state- owned Dubai World would ask creditors for a “standstill” agreement on its debt, including property company Nakheel PJSC’s $3.5 billion bond due for repayment in a week.
Russian Stocks
Russia’s Micex Index dropped 1.7 percent as oil company OAO Rosneft sank on falling crude prices. South Africa’s FTSE/JSE Africa All Shares Index declined 1.4 percent, after gold producer AngloGold Ashanti Ltd. retreated 4.2 percent.
Gold for immediate delivery fell for a third day in London, slumping 1.5 percent to $1,144.38 an ounce. The metal reached a record $1,226.56 on Dec. 3. Copper for delivery in three months retreated 0.8 percent on the London Metal Exchange. Oil for January delivery fell 0.8 percent to $74.81 a barrel in New York trading.
Treasuries rose, with the 10-year note yield dropping 1 basis point to 3.46 percent, even as the U.S. government prepared to sell $74 billion in notes and bonds this week, starting with an auction of $40 billion of three-year notes tomorrow. The yield on the German bund fell 3 basis points to 3.20 percent.
To contact the reporter on this story: Justin Carrigan in London at jcarrigan@bloomberg.net
Last Updated: December 7, 2009 08:27 EST
AOL Chief Takes Apple Turnaround as Model to Revive Ad Sales
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By Tom Lowry
Dec. 4 (Bloomberg) -- AOL Inc. Chief Executive Officer Tim Armstrong is on a mission to show that the company isn’t some dot-com has-been selling Web access and e-mail. It’s a digital- media company with 80 Web sites churning out everything from personal finance advice to bedroom tips for women.
The 100 million unique viewers AOL attracts each month are enough to lure advertisers eager to reach multiple audiences with one ad buy, says Armstrong, 38, who took over eight months ago.
Armstrong faces competition from Yahoo! Inc., Microsoft Corp. and Barry Diller’sIAC/InterActiveCorp, and a slew of startups -- all pushing their own content. While Armstrong says content is at the heart of his strategy, AOL already tried that and failed. Meanwhile, AOL employees, having endured multiple layoffs and strategies over the past decade, are demoralized and weary of yet another makeover, Bloomberg BusinessWeek reported in its Dec. 14 issue.
“This is a challenge, I know that,” says Armstrong, a first-time CEO who took the job after nine years at Google Inc. “We have to create a company that doesn’t settle for mediocrity.”
The New York-based company, which will separate from Time Warner Inc. on Dec. 10, nine years after their failed merger, has gone through multiple permutations over the past 25 years.
When it was founded in 1985, it provided software for Commodore computers; a decade later, it became America Online. AOL introduced millions of Americans to the Web, and the slogan, “You’ve got mail,” embedded itself in the popular culture.
As AOL’s stock soared, then-CEO Steve Case developed an ambition to acquire Time Warner, one of the world’s largest media companies. The deal closed on Jan. 11, 2001. After that, AOL adopted and jettisoned several strategies, and AOL Time Warner shareholders saw more than $100 billion in market value evaporate.
Yahoo, Google
Yahoo, Google, News Corp.’s MySpace, and Facebook Inc. came to define the Web. This year, Time Warner CEO Jeffrey Bewkes, who had criticized the merger when he was running Time Warner’s HBO, set in motion the divorce. He hired Armstrong as CEO. During nine years at Google, most of them as head of U.S. ad sales, Armstrong had made peace with advertisers, then suspicious of Google’s motives, and helped turn the search service into a $20 billion advertising juggernaut.
“Tim needs to articulate the value of AOL,” says Robert W. Pittman, a former AOL Time Warner chief operating officer. “He needs a strong selling proposition.”
Standing Ovation
On March 17, a rainy St. Patrick’s Day, Armstrong made his AOL debut before 1,000 employees packed into a large tent outside the original Dulles, Virginia, headquarters. Case and former AOL Vice-Chairman Ted Leonsis spoke first. They didn’t dwell on the past and focused on how Armstrong would transform AOL. Then Armstrong, who is 6-foot-4-inches, took the podium. The crowd, some wiping away tears, gave him a standing ovation. A few days later, he reported for duty on the fourth floor of the Wanamaker Building in downtown Manhattan.
AOL’s original enterprise -- selling Web access -- is dying, but the new operation -- selling ads -- isn’t big enough to replace it. Recently, the company has made up for the loss in subscriber revenue by cutting costs.
Then came this year’s advertising drought. For the first nine months of 2009, AOL’s revenue dropped 24 percent to $2.4 billion, while operating profit shrank 34 percent to $765 million. According to estimates from equity research outfit Sanford C. Bernstein, operating profit will continue to decline, by 10 percent, to $880 million in 2012.
Market Research
When Armstrong took over, it had been almost three years since AOL had done any market research and the company had been without a chief marketing officer for 12 months. In those first days on the job, Armstrong found out he needed to reach three kinds of people; those whose still use AOL e-mail and regularly visit AOL news, music, and entertainment sites; younger people who use pop-culture sites like FanHouse, Stylelist, Spinner or PopEater, and don’t know that AOL owns and operates them; and those who gave up on AOL.
Armstrong hired the ad firm Leo Burnett to conduct surveys among 5,000 people aged 18 to 65. Burnett found that most people are aware of AOL but lack strong feelings about it. About half said they didn’t know what AOL did anymore.
“AOL has the awareness,” says Pittman. “It just has to drive out the fuzziness.”
First 100 Days
In his first 100 days, Armstrong visited 16 cities around the world. He says he has spoken with 10,000 people --employees, advertisers, investors and people he meets at conferences. He reached out to fellow executives. David Stern, a friend and commissioner of the National Basketball Association, told him not to be afraid of experimenting. Mickey Drexler, the CEO of J.Crew Group Inc., also in the Wanamaker building, regularly drops by. He told Armstrong to listen to customers and workers.
Armstrong has become a student of corporate turnarounds. He asks employees to read a 1996 BusinessWeek cover story about Apple headlined “The Fall of an American Idol,” about the company before Steve Jobs’ return. Armstrong has taken much of his road map from the Apple recovery, which he sums up as: “New products and services that people find necessary.”
Yahoo and other rival sites are mainly aggregators, taking others’ content -- news, politics, sports, music -- and selling ads against it. Armstrong aims to stand out by creating original content. A year ago, AOL licensed as much as 80 percent of its content; today, the company says, it generates 80 percent of it. Bill Wilson, AOL’s content chief, has exploited traditional media’s implosion to hire seasoned journalists. Their expertise and voices, Armstrong says, will enhance AOL’s brand. Each week, about 30 AOL editors appear on TV and radio.
Local Focus
As local newspapers wither away, AOL is positioning itself as the go-to source for local communities. Its main vehicle is Patch.com, a collection of sites with a local focus that AOL acquired in June. Armstrong was an investor but agreed not to take a profit on the sale. The sites, each operating under a single editor, offer local news and sports, restaurant offerings, and events in towns with populations of 15,000 to 50,000. AOL operates 25 Patch sites and plans to have hundreds more in the next year. The idea is to lure national advertisers keen to reach local consumers. So far, advertisers are mostly local, such as colleges, arts centers and florists. Other sites, including Topix, a venture by McClatchy Co., Gannett Co., and Tribune Co., are vying for that market.
AOL E-mail
AOL says that e-mail drives people to its sites, particularly since visitors see a page of headlines hawking AOL content whenever they sign on. While instant messaging remains popular, regular AOL e-mail lost 15 percent of its U.S. market share in the last year to rivals such as of Yahoo and Google.
To help reverse those trends, Armstrong recruited Brad Garlinghouse, a former Yahoo executive who helped the company go from No. 3 to No. 1 in e-mail. One of the first things he did was to reduce the advertising on AOL e-mail by 60 percent to eliminate the clutter. He also ditched rules that had chased away users. For example, AOL e-mail users could never put a period or an underscore in their addresses. Now they can.
To help sell the new AOL to advertisers, Armstrong poached a Google colleague, Jeff Levick, calling him during a family vacation in St. Bart’s to make his final pitch. A former mergers-and-acquisitions lawyer, Levick brought with him contacts, a sense of Armstrong’s thinking, and a commitment to do for brand advertising at AOL what he had done for search advertising at Google.
Too Much Inventory
Shortly after he started in April, Levick concluded AOL had too much advertising inventory -- industry lingo for places to put ads. He and Armstrong agreed the oversupply was hurting the rates AOL could charge advertisers. Levick cut the number of ads on the home page from 10 to one.
“You raise the quality and charge a premium,” Levick says. He isn’t saying whether the tactic is working.
Armstrong wants to give advertisers real-time information so they can tweak their messages. He brought in another Google veteran, Shashi Seth, whose job had been to wring as much money out of ads as possible. Seth gathered 55 AOL computer scientists and ordered them to design algorithms that can predict when demand for specific products and services peak. The technology lured ad buyer Interpublic Mediabrands. Under an October partnership with AOL, Interpublic Mediabrands will share resources and research, as well as take advantage of AOL technologies.
‘Novel Approach’
“What we’re seeing here is a very novel approach to advertising,” says Quentin George, Interpublic Mediabrands’ chief digital officer. “We’re excited about how they are looking at consumer demand when it comes to content.”
Unlike some of his predecessors, Armstrong is unafraid to hitch sites to the AOL brand. In the past, he says, some AOL- owned “services were like little speedboats racing away from the AOL name,” he says.
“You may or may not see the AOL name on the title of our sites, but you will begin to see a more consistent effort to promote the AOL brand on the sites themselves,” says Wilson, the content chief. Having the AOL name attached could hurt some of the sites. For example, consumers said if the Politics Daily site added the AOL name they might think the site is biased.
Armstrong is embarking on a 10-city U.S. roadshow. If consumers are apathetic about AOL, some investors are wary. Having been burned by the 2001 merger, money managers may require the hardest sell.
“Why would I buy AOL?” says a media investor, who asked not to be identified. “It would largely be a bet on Tim, given what he was able to do at Google.”
AOL may never again be a $70 stock. By some estimates, its market cap will be about $3 billion. That’s not enough to make it into the Standard & Poor’s 500, meaning AOL won’t be able to tap the investors who buy that index. Still, Armstrong says AOL will have a chance to show investors that it is the media model of the future.
To contact the reporter on this story: Tom Lowry in New York at Tom_Lowry@businessweek.com.
Last Updated: December 4, 2009 00:01 EST
Whitacre’s GM Culture Fix Moves Up Younger Executives, Women
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By Jeff Green and Katie Merx
Dec. 5 (Bloomberg) -- General Motors Co. Chairman Ed Whitacre turned to a new team that includes younger executives and more women as he tries to overhaul the automaker’s “inbred” culture and halt annual losses dating to 2005.
Engineering chief Mark Reuss, 46, was promoted to president of GM’s North American operations and Susan Docherty, 47, one of three women promoted yesterday, added marketing to her sales duties. Vice Chairman Bob Lutz, 77, ceded those responsibilities and will be an adviser to Whitacre.
“It’s a signal they are serious about getting younger people in and running the place right,” said Thomas Stallkamp, 63, industrial partner at buyout firm Ripplewood Holdings LLC and a member of the team that helped restructure Chrysler Corp. in the 1990s. “This is a culture that was so inbred, so genteel, people were afraid to speak up.”
Whitacre, 68, has said in media interviews and in meetings with staffers that employees need to shed GM’s culture and hasten efforts to cut costs and regain market share. The former chairman and CEO of AT&T Inc. reiterated the pledge this week as his board ousted Chief Executive Officer Fritz Henderson and Whitacre became interim CEO.
“Most of what has occurred this week at General Motors is about speeding things up and making people more accountable for the decisions they make,” John Wolkonowicz, an analyst at consultant IHS Global Insight in Lexington, Massachusetts, told Bloomberg Television.
International Operations
Nick Reilly, 59, will lead GM’s European business, the Detroit-based automaker said yesterday in a statement on its Web site. Tim Lee, 58, replaces Reilly as president of international operations. Whitacre also will use director Stephen Girsky, 47, as an adviser, people familiar with the plans said.
Reuss served as president and managing director of Holden in Australia prior to being appointed head of global engineering in July. He will give an update on GM’s business Dec. 8, the company said. Whitacre, who was originally slated to deliver the briefing, had a scheduling change, said Tom Wilkinson, a GM spokesman.
“I know this leadership team can count on you to step up and be responsible, do the right thing and together we can move forward,” Whitacre said yesterday on a broadcast to employees. “We can have a good time doing it.”
Whitacre took the chairman’s job as GM left Chapter 11 in July has said he wants to start repaying federal loans early. The U.S. government is owed $6.7 billion and owns a 61 percent stake in the biggest domestic automaker, which still expects an initial public offering in 2010’s second half.
More Women
Docherty, promoted to chief of sales in October from the head of the Buick GMC division, was appointed vice president of vehicle sales, service and marketing. She takes some of the duties Lutz had handled since July.
Tom Stephens, 61, remains vice chairman of global product operations and will add global purchasing to his duties.
Diana Tremblay, 50, becomes vice president of manufacturing and labor relations. Denise C. Johnson, 43, most recently vehicle line director and chief engineer for global small cars, was named vice president of labor relations.
“I was very surprised by how many women were promoted,” said auto analyst Rebecca Lindland of IHS Global Insight.
Karl-Friedrich Stracke, 53, was promoted to vice president of engineering from executive director of engineering. Chris Preuss, 43, vice president of communications, reports directly to Whitacre; he had reported to Lutz.
Change Is Good
“Almost by definition, any change is probably good for the company because GM has resisted change so heavily in the past,” said John Casesa, managing partner of consultant Casesa Shapiro Group LLC in New York. “GM’s resistance to change is one of the key reasons for its decline.”
GM has posted $88 billion in losses since the end of 2004. The company’s U.S. sales this year through November tumbled 32 percent, more than the industry’s 24 percent decline. GM’s market share fell to 19.8 percent, from 22.1 percent a year earlier, according to Autodata Corp.
Last month, GM said it generated $3.3 billion in cash from July 10, when it exited bankruptcy, through Sept. 30. The company posted a loss of $1.15 billion for the period and said it would use more cash than it brings in this quarter.
“The government has given GM a lot of runway, they should be able to use that time to develop a plan and get in their rhythm,” Casesa said.
Henderson, 51, was asked to resign after the board concluded he hadn’t done enough in the 144 days since emerging from bankruptcy to fix GM’s finances and culture, people familiar with the matter said. He became CEO in March, replacing Rick Wagoner as the former General Motors Corp. slid into bankruptcy June 1. It emerged 40 days later as General Motors Co.
“The speed these changes were made with shows this is not the lumbering GM we’ve known in the past,” Michelle Krebs, senior analyst at Santa Monica, California-based researcher Edmunds.com, said in a telephone interview. “It shows that they’re truly trying to transform the company.”
To contact the reporters on this story: Jeff Green in Southfield, Michigan, at jgreen16@bloomberg.net; Katie Merx in Southfield, Michigan, at kmerx@bloomberg.net.
Last Updated: December 5, 2009 00:01 EST
Hershey Said to Have Been in Contact With Nestle Over Cadbury
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By Jacqueline Simmons, Ambereen Choudhury and Thomas Mulier
Dec. 5 (Bloomberg) -- Hershey Co., exploring its options for a possible bid for Cadbury Plc, has been in contact with Nestle SA, said two people familiar with the talks.
An agreement between Hershey and Nestle may not be reached, and Hershey would prefer to bid alone, said the people, who declined to be identified because the talks are private. Any offer would challenge an unsolicited 10.2 billion-pound ($17 billion) bid from Kraft Foods Inc.
Teaming up with Nestle would provide Hershey with more cash for an offer, said Christopher Growe, an analyst at Stifel Nicolaus & Co. A Kraft takeover of Cadbury, the owner of Dairy Milk chocolate and Trident gum, would create the world’s largest maker of candy.
“Hershey is an uncompetitive bidder without a partner,” Growe, who is in St. Louis, said yesterday by telephone. He recommends selling Hershey shares and holding Kraft.
Nina Backes, a spokeswoman for Vevey, Switzerland-based Nestle, declined to comment earlier yesterday when asked about Cadbury. Kirk Saville, a spokesman for Hershey, also declined to comment.
Trevor Datson, a Cadbury spokesman, declined to comment on whether Cadbury has been approached by Hershey or Nestle.
Cadbury, which has traded above Kraft’s cash-and-stock offer since it was made, fell 5 pence to 795 pence in London trading yesterday. Northfield, Illinois-based Kraft rose 15 cents to $26.57 in New York Stock Exchange composite trading.
Kraft Offer
Kraft, the maker of Oreo cookies and Toblerone chocolate, is offering 718 pence a share, based on that closing stock price and began its unsolicited tender offer for Cadbury yesterday.
Holders of London-based Cadbury have until Jan. 5 to accept the offer, which is the same as a proposal outlined on Sept. 7 and Nov. 9, Kraft said in a statement. The company can extend the deadline, and has until Feb. 2 to win over shareholders.
“We’re not going to engage in speculation on possible talks of others,” said Mike Mitchell, a Kraft spokesman, in an e-mail. “We’re the only offer on the table.”
Cadbury has until Dec. 18 to file a response arguing against a takeover or seeking a higher price. The company has called Kraft’s cash-and-stock offer an “unappealing prospect” from a “low-growth” conglomerate.
‘Compelling Logic’
Hershey, the maker of Reese’s Peanut Butter Cups, said in a Nov. 18 regulatory filing it was “reviewing its options.” Nestle is weighing options including a possible bid for Cadbury, two people with knowledge of the matter said last month.
“There is compelling logic for both Nestle and Hershey to seek to structure an alternative to the current offer for Cadbury from Kraft,” David Hayes and Alex Smith, analysts at Nomura International Plc in London, said in a note this week.
Nestle, the world’s biggest food company, could buy back the U.S. rights to Kit Kat and Rolo brands from Hershey, giving Hershey the power to fund a combination with Cadbury that would value the U.K. company at 840 pence a share, Nomura said.
Another option would be for Nestle to acquire Cadbury’s gum unit. Nestle bidding on its own may value Cadbury at almost 900 pence a share to gain gum and then sell the chocolate division to Hershey or Ferrero SpA, according to the Nomura analysts.
Ferrero, the Italian maker of Tic Tacs and Nutella spread, said last month it was in “preliminary stages of evaluating its options in respect to Cadbury.”
Hershey, based in the Pennsylvania town of the same name, rose 9 cents to $35.99 in New York. Nestle shares advanced 13 centimes to 49.90 francs in Zurich.
Kraft has 46 days to raise its offer if it chooses, according to U.K. takeover law. A competing bid would trigger a new timetable.
“Ultimately, there’s no counteroffer on the table, no matter what the noise has been, so there’s no reason for Kraft to have raised their offer,” said Alexia Howard, an analyst with Sanford C. Bernstein & Co. in New York.
To contact the reporters on this story: Jacqueline Simmons in Paris at jackiem@bloomberg.net; Ambereen Choudhury in London at achoudhury@bloomberg.net; Thomas Mulier in Geneva at tmulier@bloomberg.net.
Last Updated: December 5, 2009 00:01 EST
Geithner Rejects Goldman Sachs Assertion It Didn't Need U.S. Help
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By Rich Miller and Christine Harper
Dec. 5 (Bloomberg) -- Treasury Secretary Timothy Geithner disputed claims by Goldman Sachs Group Inc. executives that the bank could have survived the financial crisis without government help and said it and other Wall Street firms should show some restraint in handing out bonuses this year.
“It is very important that we change the way these executives are paid, the form of compensation, this year,” Geithner said in an interview yesterday for Bloomberg Television’s “Political Capital with Al Hunt,” which is being aired throughout the weekend. “We have to end that era of irresponsibly high bonuses.”
President Barack Obama has blamed compensation tied to excessive risk-taking for fueling the deepest financial crisis since the Great Depression. The administration has named a special master to approve compensation packages at firms that have received the biggest government bailouts.
Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co.’s investment bank are set to pay record combined bonuses this year, according to analysts’ estimates. Goldman set a Wall Street pay record in 2007 when its compensation totaled $20.2 billion, including $68.5 million for chairman and chief executive officer Lloyd Blankfein.
Blankfein told Vanity Fair magazine in an article published online this week that he thought the company could have survived the financial turmoil on its own without government help. Goldman’s president, Gary Cohn, was more definitive. “I think we would not have failed,” he told the magazine. “We had cash.”
Geithner, 48, took issue with that, saying that the entire financial system was at risk at the height of the crisis, including Wall Street’s big institutions.
‘Classic Bank Run’
“None of them would have survived” had the government stood aside and let the crisis run its course, he said. “The entire U.S. financial system and all the major firms in the country, and even small banks across the country, were at that moment at the middle of a classic run, a classic bank run.”
New York-based Goldman Sachs, the fifth-largest U.S. bank by assets, accepted $10 billion from the Treasury and other forms of government support last year. It has since returned the funds with interest, as have firms including Bank of America Corp., JPMorgan Chase and Morgan Stanley.
Geithner said that most of the money the federal government injected into banks through the Troubled Asset Relief Program will likely be paid back. “We now estimate that we’re probably going to have $175 billion in repayments from the banking system by the end of next year,” he said.
Goldman spokesman Lucas van Praag said the firm recognized that it would have failed had the financial system broken down.
Government Action
“If the financial system collapsed, we would have collapsed too,” he said. “We believe that government action averted a major systemic problem.”
He added that Goldman acted on its own to raise capital amid the turmoil. “We had cash and funding that would have allowed us to survive for quite a long time,” he said.
Geithner said that even institutions that have repaid the government should show restraint in paying out bonuses, arguing that Wall Street’s compensation practices had encouraged excessive risk-taking.
“We want to see fundamental constraints in how senior executives are paid,” the Treasury secretary said.
He said he wants compensation at financial institutions to be tied more to their long-term performance, rather than to short-term gains. Should those gains prove ephemeral, the bonuses would be clawed back, he added.
“The basic problem we face across the system is that executives were paid for taking imprudent risks,” Geithner said.
The Federal Reserve has said it will review the 28 largest banks to ensure that compensation doesn’t create incentives for excessively risky investments. It also offered guidelines on making pay more tied to risk management.
To contact the reporters on this story: Rich Miller in Washington rmiller28@bloomberg.net; Christine Harper in New York at charper@bloomberg.net.
Last Updated: December 5, 2009 00:00 EST
Economists Who Foresaw U.S. Payroll Surprise Now See Job Gains
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By Timothy R. Homan
Dec. 5 (Bloomberg) -- Some of the economists who anticipated the U.S. job market would see marked improvement in November now project job gains are around the corner, and possibly in the rearview mirror.
Payrolls fell by 11,000 workers, while the unemployment rate dropped to 10 percent. Jobs were forecast to decline 125,000, according to the median estimate of 82 economists surveyed by Bloomberg News. Estimates ranged from decreases of 30,000 to 180,000.
The drawdown in inventories and rising corporate profits are the most compelling reasons for payrolls to begin showing sustainable increases as soon as this month, these economists said. What’s more, the recent trend of upward revisions will probably continue, signaling the worst employment slump in the postwar era may have already ended.
“We could see a positive number for November next month,” said Stefane Marion, chief economist at National Bank Financial Inc. in Montreal, whose forecast of a 30,000 payroll drop was the closest. “Firms now are beginning to redeploy some of their cash flows” by hiring new workers, he said.
Revisions added 159,000 jobs to payroll figures previously reported for October and September, a report from the Labor Department showed yesterday in Washington. The previous month’s report added 91,000 for September and August.
Profits, Inventories
Corporate profits climbed 21 percent from January through September, the biggest three-quarter gain in five years, while inventories plunged at a record pace, according figures from the Commerce Department. Leaner stockpiles set the stage for recovery in production.
“If you run down your inventories hard, you also cut your labor force,” said Peter Possing Andersen, an economist at Danske Bank A/S in Denmark who projected a decline of 50,000 jobs for November. He said the ramp up in production means the manufacturing industry, which has cut workers for the past two years, may stabilize and begin hiring in “a couple of months.”
Still, some economists say that even if November’s figures are revised into positive territory, payrolls may not have reached their low point yet. “Revisions lately have been in the favorable direction,” said Neal Soss, chief economist at Credit Suisse in New York who forecast a 50,000 drop in payrolls. “We shouldn’t take that as evidence that we’re at the bottom.”
The improving labor market indicates the deepest U.S. recession since the 1930s may have ended, said the head of the group charged with making the call.
Yesterday’s report “makes it seem that the trough in employment will be around this month,” Robert Hall, who heads the National Bureau of Economic Research’s Business Cycle Dating Committee, said in an interview.
To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net
Last Updated: December 5, 2009 00:00 EST
China Gas May Increase LPG Sales Sixfold on Expansion (Update2)
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By John Duce
Dec. 7 (Bloomberg) -- China Gas Holdings Ltd., the Hong Kong-listed supplier of the fuel to homes and businesses on the mainland, expects liquefied petroleum gas sales to surge sixfold as the company expands its distribution network to 300 cities.
Sales of bottled LPG may rise to 3 million tons by March 2012 as the company extends sales beyond the 113 cities it currently sells the fuel in, Chief Financial Officer Eric Leung said in an interview. The shares reached a two-year high today.
The government aims to increase the nation’s use of gas to reduce reliance on more polluting coal. China Gas, which sold about 500,000 metric tons of LPG in the last financial year, will mainly target areas not linked by pipelines, Leung, 60, said at an LPG storage base on Xiaomen island off Wenzhou city in Zhejiang province on Dec. 3.
“The company’s target of increasing LPG sales is realistic as demand for LPG is huge, being a cheap form of fuel, and many villages and rural areas don’t have access to piped gas,” said Shi Yan, an energy analyst at UOB-Kay Hian in Shanghai.
China Gas’s expansion comes after the company signed an LPG supply agreement with a unit of the nation’s biggest oil company PetroChina Co. The utility has an advantage over rivals because of the supply accord and China Gas’s LPG storage and distribution network, Shi said.
Utilities including China Gas, Xinao Gas Holdings Ltd. and China Resources Gas Group Ltd. have more than doubled in Hong Kong trading this year, outpacing the 55 percent gain in the benchmark Hang Seng index, as they increase supplies to meet demand in the world’s fastest-growing major economy.
China Gas rose 6.4 percent to HK$3.64 today, the highest since Dec. 6, 2007, compared with the 0.8 percent decline in the Hang Seng index.
Rural Areas
The fuel distributor will extend its network in the southern provinces of Guangdong, Guangxi, Fujian, and Jiangsu, Anhui and Zhejiang in the east, Leung said.
“We have largely concentrated on our piped natural gas projects, but our supplies of LPG will allow us to move into new cities and also target suburban and rural areas which are not connected to gas pipelines,” Leung said.
China Gas will invest as much as 200 million yuan over the next three years to build LPG bottling stations and retail outlets in the target cities and districts, according to Leung.
The company estimates about a third of China’s population has access to piped gas. “It means there’s tremendous potential for the sale of bottled LPG in areas still not served by pipelines,” Leung said.
China Gas aims to generate about 18 billion yuan ($2.6 billion) in revenue from LPG by 2012, said Investor Relations Manager Frank Li. LPG sales reached HK$2.2 billion ($284 million) last year, or about a third of total revenue.
Nationwide Demand
Chinese companies have invested $30 billion over the past five years building pipelines to transport gas from Sichuan, Xinjiang and Ordos in Inner Mongolia to urban centers in the east, Sanford Bernstein & Co. said in an Oct. 13 report.
PetroChina estimates that the nation’s gas demand will rise to 215 billion cubic meters by 2015 from about 80 billion cubic meters last year, President Zhou Jiping said on Aug. 28.
The government is likely to ease controls on gas prices in the first quarter and link them to the international market, Leung said. This could result in gas prices rising 10 percent annually for the next five years, he said.
PetroPower (Shanghai) Holdings Ltd., China Gas’s LPG division, is considering listing shares in Shanghai or Shenzhen within three to five years, said Pang Yingxue, the unit’s president.
PetroChina is in preliminary talks on buying a stake in China Gas’s LPG unit, Leung said.
To contact the reporter on this story: John Duce in Hong Kong at Jduce1@bloomberg.net
Last Updated: December 7, 2009 03:26 EST
Yen’s Biggest Drop in Decade No Anomaly With Options (Update2)
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By Yasuhiko Seki and Ron Harui
Dec. 7 (Bloomberg) -- Options traders are growing less bullish on the yen after efforts by Japanese officials to boost the world’s second-biggest economy and a U.S. jobs report led to the currency’s biggest weekly decline in a decade.
Japan’s currency plunged 2.5 percent against the dollar and 1.3 percent versus the euro on Dec. 4 after the U.S. Labor Department said employers cut the fewest jobs since the recession began. The yen rose against the dollar today, after sinking last week by the most since February 1999, extending a retreat from a 14-year high. Traders sold yen and bought dollars on speculation U.S. interest rates will increase before June.
“The improving U.S. jobs market suggests the Federal Reserve won’t stand pat on interest rates longer than the Bank of Japan,” said Kazutoshi Yasuda, general manager of the markets department in Tokyo at FX Prime Corp., a unit of Itochu Corp. Increased U.S. borrowing costs would lead traders to favor using yen to finance higher-yielding investments, leading to more losses for the Japanese currency, he said.
Options showed declining bets the yen will rise. The odds for a gain to 84.5 yen per dollar by the end of March from 90.56 last week fell to 38 percent from 80 percent on Nov. 30, data compiled by Bloomberg show. Chances of a decline to 92 versus the dollar by Dec. 31 reached 63 percent. Options grant buyers the right to purchase or sell an asset at a predetermined price.
Weekly Tumble
The yen tumbled 3.6 percent versus the euro last week, the sharpest slide since the five days to April 3. The yen also fell 4.5 percent against the dollar, the most since the week ended Feb. 19, 1999, when it slumped 5.9 percent. The yen’s biggest drop during the week came after the U.S. Labor Department said payrolls dropped by 11,000 last month, the smallest decrease since the recession began.
The yen traded at 89.98 per dollar as of 6:35 a.m. in New York, from 90.56 last week, and 133.26 per euro from 134.54.
“What the job numbers do is firm up expectations that the Fed interest-rate hike is coming,” said Camilla Sutton, a strategist in Toronto at Bank of Nova Scotia, the nation’s third-largest lender. “That should be a strong-dollar story.”
Federal-funds futures contracts on the Chicago Board of Trade show a 43.3 percent probability the U.S. central bank will raise its target rate for overnight bank borrowing to 0.5 percent by June from the current range of zero to 0.25 percent, up from 12.6 percent odds a month ago.
‘Finally Turning’
UBS AG expects the Fed to set its key rate at the top end of its 0.25 percent range in April and follow with a quarter- point increase in June. The jobs report and last week’s gains “suggest the greenback is finally turning,” Mansoor Mohi- uddin, the Zurich-based bank’s global head of currency strategy, wrote in a note to clients.
The yen was the best performer against the dollar among the 16 most-traded currencies the past four years, Bloomberg data show. It surged to 84.83 on Nov. 27, the strongest since July 1995, from 124.13 in June 2007. The yen tends to advance amid financial turmoil because Japan’s trade surplus reduces reliance on foreign capital.
Record low U.S. interest rates have kept the dollar under pressure at the expense of the yen, making the greenback the favorite for so-called carry trades, where investors raise funds in countries with low borrowing costs and use the proceeds to invest in countries with higher returns.
Benchmark rates of as low as zero in the U.S. and 0.1 percent in Japan compare with 3.75 in Australia and 2.5 percent in New Zealand.
Libor
The London interbank offered rate, or Libor, for three- month loans in the U.S. currency has been below the equivalent yen rate since Aug. 24. In the decade before then, the dollar rate averaged 2.94 percentage points more than the yen rate.
Contracts betting the yen would climb against the dollar rose to 51,710 on Nov. 27, the most since May 2008, according to the Commodities Futures Trading Commission in Washington based on contracts at the Chicago Mercantile Exchange. As recently as June, there more contracts betting on a decline than a gain.
Such “extreme” positioning may suggest that the decline in the yen represents traders unwinding “long” positions rather than an outright bet on the currency’s depreciation, Marc Chandler, the global head of currency strategy at Brown Brothers Harriman & Co. in New York, said in a note to clients on Dec. 4.
The median estimate of more than 30 strategists surveyed by Bloomberg is for the yen to end March at 92 to the dollar and 136 to the euro.
‘Urgent Steps’
Fujio Mitarai, head of Japan’s largest business lobby, called on the government to take “urgent steps” on Nov. 27 to curb gains in the yen, which make Japanese exports less competitive and threaten corporate profits. The same day, Finance Minister Hirohisa Fujii said in Tokyo the nation will “do what is necessary” and he may contact U.S. and European officials to act.
Exports make up about 12 percent of Japan’s economy, compared with 6 percent in the U.S. The nation’s gross domestic product is forecast to shrink 5.7 percent this year, according to the median estimate of economists surveyed by Bloomberg. That compares with a contraction of 2.4 percent in the U.S.
The Bank of Japan announced an emergency 10 trillion yen ($113 billion) credit program on Dec. 1 to combat falling prices and the stronger yen. The spread between dollar- and yen-based Libor narrowed to 2.72 basis points on Dec. 4 from as much as 7.25 basis points on Sept. 8.
Stimulus Plan
“The BOJ’s action worked,” said Masato Mori, senior manager of the business and marketing department at NTT SmartTrade Inc. a unit of Nippon Telegraph & Telephone Corp. “Stopping the yen’s advance will require additional spending from the government.”
A stimulus plan worth as much as 4 trillion yen may be agreed upon today, Chief Cabinet Secretary Hirofumi Hirano said last week. The government planned to announce the measures on Dec. 4 before disagreements between Prime Minister Yukio Hatoyama’s ruling Democratic Party of Japan and coalition partners, who want a larger package, caused a delay.
Bonds to be issued in the fiscal year starting April 1 may reach 146.2 trillion yen compared with a revised 132.3 trillion yen this year, according to Citigroup Global Markets Japan Inc.
“There is probably enough in the policy action in Japan by the government and the BOJ to argue for further upside on cross- yen currencies near term,” said Greg Gibbs, a foreign-exchange strategist at Royal Bank of Scotland Group Plc in Sydney.
To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.
Last Updated: December 7, 2009 06:42 EST
Universal Music CEO Courts AT&T, McDonald’s for Vevo Web Site
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By Kristen Schweizer and Adam Satariano
Dec. 7 (Bloomberg) -- Universal Music Group Chief Doug Morris, head of the world’s biggest record label, is playing ad- man to lure marketers to the Vevo music-video Web site in the latest bid to rebuild the industry.
Morris, 71, has split his time the last few months courting advertisers for Vevo, he said in a Dec. 2 interview. The site will be introduced tomorrow at an event in New York where Mariah Carey, Rihanna and Lady Gaga are scheduled to attend. AT&T Inc., McDonalds Corp. and MasterCard Inc. have agreed to advertise, according to New York-based Vevo.
Vevo, powered by Google Inc.’s YouTube and featuring music videos, concert footage, interviews and original content, allows record labels to attract premium-prices for ads while controlling how music is viewed and distributed online, Morris said. The effort to reverse the industry’s decline may be Morris’s final salvo as he prepares to hand over the reins at Universal to international music head Lucian Grainge.
“The music business has been taken advantage of for years,” said Morris. “This is our opportunity with Vevo to take back control of our product.”
Vevo is co-owned by Vivendi SA’s Universal Music, Sony Corp. and the Abu Dhabi Media Co. Terra Firma Partners Ltd.’s London-based EMI Group Ltd., the label of Norah Jones and Coldplay, is near a licensing deal to provide material to the site, a person familiar with the plans said last week. Negotiations to add material from Warner Music Group Corp. are ongoing, people familiar with the matter said.
Record companies are trying to capture the growth in online ads and offset an almost 50 percent decline in U.S. album sales from 2000 to 2008, as measured by Nielsen SoundScan. Global ad spending for online videos is projected to more than triple to $7.6 billion by 2012, according to New York-based researcher eMarketer.
YouTube
YouTube, which generates more than 1 billion views per day, is projected by Credit Suisse to lose $470 million in 2009. The company sees Vevo as a way to expand beyond advertising by licensing its software, said Chris Maxcy, director of content partnerships at YouTube.
“We do think it’s going to be a good business opportunity,” Maxcy said.
Universal Music’s revenue fell 5.2 percent to $2.78 billion in the 9 months through September, even as digital sales surged 21 percent. At Edgar Bronfman Jr.’s publicly traded Warner Music, digital sales grew 10 percent for the year ended in September while overall revenue fell 9 percent.
New York-based Warner Music rose 17 cents to $5.27 on Dec. 4 in New York Stock Exchange composite trading. The shares surpassed $30 in 2006. Vivendi gained 49 cents to 20.50 euros in Paris and has lost 12 percent this year. Sony added 35 yen to 2,510 yen in Tokyo.
‘Elephants Mating’
Vevo’s owners are betting the site will command premium ad rates because of its professional content compared with YouTube’s often-grainy user-generated material, Morris said. Universal Music and Sony Music videos have been collectively streamed about 15 billion times on YouTube, according to Vevo.
“I don’t think most advertisers want their product next to a video of elephants mating,” Morris said.
User-generated or pirated videos make up about 90 percent of streams on YouTube, said David Hallerman, a senior analyst at eMarketer.
“There’s very little targeting that goes on,” he said. “Even though it is such high-quality content.”
Record companies have often battled with YouTube as they sought to increase payments. Universal receives “a percentage of a penny” each time a clip is viewed, Morris said.
Last year, Warner Music removed its videos from YouTube after negotiations over royalties failed. In March, YouTube in the U.K. and Germany blocked access to premium videos by the four big labels after talks with collection societies collapsed.
Profit Goal
It isn’t clear when Vevo will become profitable, said the site’s CEO, Rio Caraeff. Vevo will focus on attracting a large audience and will eventually expand beyond advertisements as a revenue source, he said.
Vevo’s owners want the site to become a syndication platform for music videos across the Web, Caraeff said. That would mean striking new agreements with Yahoo! Inc. and AOL Inc. when existing licensing deals expire, he said.
False Starts
Previous online efforts by the record labels have struggled. Last year, News Corp. introduced MySpace Music, a Web site where the four labels sought to sell as, sponsorships, concert tickets and merchandise. The venture “disappointed” Warner Music CEO Bronfman and had been slow to “create monetization tools,” he said this year.
Warner Music has a separate plan to make money from online ads, and has hired New York-based Outrigger Media as exclusive sales agent to control the way ads are sold next to videos and artist content online. Warner reached a revenue- sharing agreement in September to sell advertisements alongside its videos on YouTube.
“We think the online video category is strategically significant and there’s a premium ad business opportunity around video that’s different than audio,” said Michael Nash, a Warner executive vice president.
Universal Music and Sony made earlier stabs at digital initiatives. PressPlay, a subscription download service, was eventually sold, and Total Music shut down this year.
Vevo has potential because it has a built-in audience through YouTube, and will be able to generate revenue from other products, said Morris.
Ticketmaster Entertainment Inc. CEO Irving Azoff said he and Morris are discussing ways to offer tickets, merchandise and other items to Vevo. “It’s a great opportunity,” Azoff said.
Azoff also heads West Hollywood, California-based Ticketmaster’s Front Line Management, whose clients include the Eagles, Christina Aguilera and Jimmy Buffett.
“I’ve known Doug Morris for 30 years, he’s a very determined man, and I’ve never heard him more excited about anything he’s done in his career than this,” Azoff said.
To contact the reporters on this story: Kristen Schweizer in Los Angeles at Kschweizer1@bloomberg.netAdam Satariano in San Francisco at asatariano1@bloomberg.net
Last Updated: December 7, 2009 00:23 EST
Cephalon’s Treanda Poised for 10-Fold Sales Surge on New Data
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By Meg Tirrell
Dec. 7 (Bloomberg) -- Cephalon Inc.’s tumor fighter Treanda may reach $1 billion in annual sales, more than ten times revenue last year, with data supporting its use as a first- choice therapy for doctors against immune system cancers.
Treanda is approved for patients with a slow-growing form of non-Hodgkin lymphoma that doesn’t respond to other drugs. About 30,000 Americans have the disease. When used with Roche Holding AG’s Rituxan in a study, Treanda stalled cancer growth 20 months longer than a four-drug chemotherapy cocktail also paired with Rituxan, the current standard of care.
Lymphomas attack immune system filters in the body, called nodes, which trap infections and allow them to be destroyed by white blood cells. The newest data on Treanda was reported Dec. 5 at the American Society of Hematology meeting in New Orleans. It may make the drug, with only $75 million in 2008 revenue, the first therapy doctors use to treat this disease, and a company top-seller, said David Amsellem, of Piper Jaffray & Co.
“It could be a widely used alternative” to the chemotherapy standard, said Amsellem, an analyst based in New York, in a Dec. 3 interview. “Could it make Treanda into blockbuster type of agent, up to $1 billion in peak sales? I don’t think that’s beyond the realm of possibility.”
Cephalon, based in Frazer, Pennsylvania, declined 7 cents, or less than 1 percent, to $55.38 in Nasdaq Stock Market trading on Dec. 4. The shares lost 28 percent in 2009 before today.
3.8% of Revenue
The cancer drug generated just 3.8 percent of Cephalon’s $1.97 billion in revenue last year, its first on the market. The company’s top product, Provigil for sleep disorders, had 2008 sales of $998.4 million.
Treanda was cleared on March 20, 2008, for patients with chronic lymphocytic leukemia, a cancer of the soft tissue inside bones where blood cells are made. The drug won U.S. approval seven months later as a back-up therapy for patients with the slow-growing form of non-Hodgkin lymphoma, or NHL.
The trial, with more than 500 patients, showed Treanda delayed cancer growth for 55 months, compared with 35 months for those taking the standard regimen. After a median observation time of 32 months, 40 percent of the Treanda-treated patients had the disease completely disappear, compared with 31 percent on the older therapy, the data show.
Treanda also had fewer infections and less hair loss than the standard therapy, the research found.
‘A Homerun’
“It’s basically a homerun -- not only was it less toxic, but it was more efficacious,” said Richard Van Etten, director of the Tufts Medical Center Cancer Center in Boston, in a Dec. 5 interview. “It is potentially practice-changing.”
The four-drug chemotherapy, called CHOP, includes cyclophosphamide, adriamycin, vincristine and the steroid prednisone. Rituxan, with $2.59 billion in the U.S. sales last year for Roche’s Genentech unit, is typically added to the older medicines to improve survival. Cambridge, Massachusetts-based Biogen Idec Inc. co-markets Rituxan with Roche.
“CHOP has been the standard of care for three decades, and this is the first truly different combination,” said Vincent Picozzi, a hematologist and oncologist at the Virginia Mason Clinic in Seattle, and a scientific committee member at ASH, in an interview.
Using Treanda instead of the CHOP cocktail in slow-moving NHL treatment could increase the number of U.S. patients taking Treanda each year to about 30,000 people, Piper Jaffray’s Amsellem said.
‘First-Choice Potential’
The Treanda-Rituxan combination “has the potential to become the treatment of first choice,” said Mathias J. Rummel, the lead study author and head of the hematology department at the University Hospital in Giessen, Germany. His research was done without funding from Cephalon.
Almost 66,000 people will be diagnosed this year with non- Hodgkin lymphoma, or NHL, according to the White Plains, New York-based Leukemia & Lymphoma Society. About half will have an indolent, or slowly progressing, form of the disease.
Treanda costs about $36,000 a year, representing a sales opportunity of about $275 million if a quarter of the indolent non-Hodgkin lymphoma patients in the U.S. use the drug, Amsellem said. The treatment is also being prescribed with increasing frequency to patients as a first-line attack on chronic lymphocytic leukemia, or CLL, an approved indication, he said.
“Adding up usage in CLL, usage in relapsed/refractory NHL and first-line NHL, one could envision Treanda approaching $1 billion in sales three to four years from now,” Amsellem wrote in an e-mail.
Second Study
Another Treanda study at the hematology meeting combines the drug with Rituxan for chronic lymphocytic leukemia, and showed “very encouraging efficacy,” Cephalon Chief Medical Officer Lesley Russell said in an interview.
The company needs to examine the data and documentation in the study to determine whether it can be submitted to the U.S. Food & Drug Administration for approval of a new use of Treanda, she said.
“I would hope that toward the middle of next year we would have some idea of whether we can do this,” Russell said by telephone Dec. 3. “To see better efficacy and better tolerability is quite a significant advance.”
Treanda may be included in reference books called compendia that Medicare uses to decide whether to pay for cancer patients’ unapproved treatments, said Bret Holley, an analyst with Oppenheimer & Co. in New York. While the drug is unlikely to receive FDA approval for its third use through the German study, it may gain compendia listing by the end of 2010, he said.
While Cephalon may not promote Treanda for unapproved uses, physicians are free to prescribe the drug for so-called off- label purposes.
Reimbursement Barrier
“A compendia listing would remove many barriers to reimbursement, and we expect Treanda’s frontline NHL use to increase as a result,” Holley wrote in a Nov. 10 research note. He estimates Treanda sales will peak at $700 million from non- Hodgkin lymphoma and chronic lymphocytic leukemia uses, with about $300 million from first-line treatment of NHL.
Cephalon has started its own trial similar to the German study, Russell said. The company expects to complete it in the third quarter of 2011 and to see the data by the end of that year, according to spokeswoman Jen Antonacci.
To contact the reporter on this story: Meg Tirrell in New York at mtirrell@bloomberg.net.
Last Updated: December 7, 2009 00:00 EST
Recession Makes ‘03 Blackout Unlikely as Grid Investment Grows
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By Mario Parker and Katarzyna Klimasinska
Dec. 7 (Bloomberg) -- Six years after the biggest blackout in U.S. history, the reliability of the electricity supply is being shored up by investors betting that transmission projects are a smart wager in a weak economy.
“The current recession definitely bought some time for utilities,” said Angie Storozynski, an analyst at Macquarie Capital USA Inc. in New York. “Economic contraction reduced traffic on transmission lines, easing the pressure to add new transmission capacity.”
Economic weakness in the U.S. and Canada this heating season will reduce peak electricity demand 2.5 percent from last season to 706,965 megawatts, according to the North American Electric Reliability Corp., which oversees power systems that failed 50 million people in the August 2003 blackout.
The drop in consumption and electricity prices makes spending on the nation’s aging grid more attractive for investors than power-generation projects, said James Miller, chief executive officer of PPL Corp., the Allentown, Pennsylvania-based energy supplier. Transmission-grid projects provide more predictable earnings, he said.
State public service commissions allow utilities to earn a higher return on transmission lines than on distribution business, Storozynski said.
Pepco Holdings Inc., which is building a new transmission line from northern Virginia to Delaware, is the best performer among the Standard & Poor’s 500 Electric Utilities Index so far this quarter, thanks to the company’s investments in regulated transmission, said Paul Franzen, a utility analyst at Edward Jones & Co. near St. Louis.
Still a ‘Buy’
Pepco, based in Washington, has four “buy” ratings, five “holds” and one “sell” from analysts surveyed by Bloomberg. PPL has three “buys” and six “holds” and is still trading below analysts’ share-price expectations, according to data compiled by Bloomberg.
The Obama administration on Nov. 24 awarded $620 million for projects to help monitoring of power flows and control energy use in homes. The awards are part of the $787 billion economic stimulus package approved in February.
Infrastructure upgrades, better communication and tougher enforcement reduce the chances of repeating the 2003 blackout, which caused $10 billion of damage across eight states and Ontario, said Kelly Ziegler, a spokeswoman for NERC.
The amount of transmission investment by investor-owned utilities has almost doubled to $10.6 billion planned for this year from $5.7 billion the year of the blackout, according to the Edison Electric Institute, an industry group. The disaster left customers without power on a sweltering summer day, from Lansing, Michigan, to New York City.
‘A Sinking Ship’
“I wouldn’t have wanted to be there,” said Danny Bucklen, president of the American Power Dispatchers Association, a trade organization for electricity dispatchers. “It’s like a captain watching a sinking ship.”
The blackout created traffic jams in New York that stretched for dozens of miles and paralyzed hundreds of subway and commuter trains. Thousands of people spent the night on Manhattan sidewalks or in office lobbies, using newspapers as bedding. Tourists and New Yorkers alike wandered the streets, some fearful of another Sept. 11 disaster.
“My daughter was just freaking out,” said Ida North, a 60-year-old Warren, Pennsylvania, restaurant owner who was stranded with her daughter and two grandchildren in New York that day. “She thought it was another terrorist attack. It was so surreal.”
New Penalties
The U.S. Energy Policy Act of 2005 provides for fines that can total $1 million a day for each violation that risks reliability, including not removing tree limbs from the pathways of transmission lines, Ziegler said.
NERC imposed a $25 million penalty in October on FPL Group Inc. after its staff accidentally caused a power failure that affected about 600,000 Florida homes and businesses. The amount was 100 times the size of the next-biggest penalty handed down by NERC since the 2003 blackout prompted Congress to give the Princeton, New Jersey-based nonprofit the power to levy such punishments.
The 2003 disaster started when a sagging power line, owned by FirstEnergy Corp., an Akron, Ohio-based utility, touched a limb. U.S. and Canadian investigators blamed the spread of the blackout on Carmel, Indiana-based Midwest Independent Transmission System Operator, the utility-owned non-profit that oversees that part of the power grid.
FirstEnergy has since completed a new computer system in Ohio and Pennsylvania, upgraded its control center in Ohio and installed mechanisms to regulate power delivery to help prevent system overloads, said Mark Durbin, a spokesman. He declined to say how much the enhancements cost.
Grid Upgrades
Utilities under MISO’s purview have 332 projects planned to improve the region’s grid during the next five years, at a cost of $2.4 billion. Since 2003, those utilities have spent $2.2 billion to improve transmission lines and avoid a repeat of the blackout, said Roger Harszy, MISO’s vice president of real-time operations.
“We’re not standing still,” Harszy said in an interview inside MISO’s gymnasium-sized control room in Carmel, where a wall covered in blinking lights monitored an electrical network covering 13 states and Manitoba. “The age of the infrastructure is a concern.”
Wind Energy
One company in MISO’s network working to boost capacity and reliability is Minneapolis-based Xcel Energy Inc., the biggest U.S. supplier of wind-generated power to retail customers. It plans a $400 million, 345-kilovolt line that will snake through 150 miles of corn and soybean cropland between Hampton, Minnesota, and La Crosse, Wisconsin. Xcel said this will let it add wind energy to its system without overwhelming it and hurting reliability.
Xcel will pass the cost of transmission renovations to consumers, said Tim Carlsgaard, a company spokesman. Customers will see a $2.25 increase on an average monthly bill of $75 at the peak of construction in 2012 or 2013, he said.
It’s one more step to avoid a repeat of what tens of millions of startled citizens experienced six years ago.
Susan Eisenhower, granddaughter of the 34th U.S. president and an energy and security consultant, was in New York conducting research when the lights went out.
“It’s a reminder that we take this largely for granted,” she said in a telephone interview. “It’s an interesting case in point of how vulnerable our society is.”
To contact the reporters on this story: Mario Parker in Chicago at mparker22@bloomberg.net; Katarzyna Klimasinska in Houston at kklimasinska@bloomberg.net.
Last Updated: December 7, 2009 00:05 EST
No Escape From TARP for U.S. Banks Choking on Real Estate Loans
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By Elizabeth Hester and Linda Shen
Dec. 7 (Bloomberg) -- As the U.S. economy pulls out of a recession and the biggest banks return to profitability, mounting defaults on commercial property may keep regional lenders from repaying bailout funds until at least 2011.
Unpaid loans on malls, hotels, apartments and home developments stood at a 16-year high of 3.4 percent in the third quarter and may reach 5.3 percent in two years, according to Real Estate Econometrics LLC, a property research firm in New York. That’s a bigger threat to regional banks, which are almost four times more concentrated in commercial property loans than the nation’s biggest lenders, according to data compiled by Bloomberg on bailout recipients.
The concentration makes regulators less likely to let regional lenders like Synovus Financial Corp. and Zions Bancorporation leave the Troubled Asset Relief Program, analysts said. Smaller banks would remain stuck in TARP, while bigger lenders, including Bank of America Corp., repay the government and free themselves to set their own policies on executive pay.
“Community and regional banks basically became real estate banks in the past 25 years, and now real estate is on its back,” said Jeff Davis, an analyst at FTN Equity Capital Markets Corp. in Nashville, Tennessee. “The largest banks have other areas where they can make money, be it consumer lending, capital markets and asset management.”
Bank Failures
The stakes for taxpayers include whether they’ll get back $36.6 billion held by 35 of the largest regional lenders that received TARP money. Souring commercial real estate loans pose the biggest threat to the U.S. banking industry, according to October testimony to Congress by Sheila Bair, chairman of the Federal Deposit Insurance Corp., and Comptroller of the Currency John Dugan.
Regulators have shut 130 banks this year, all regional or community lenders, costing the FDIC more than $33 billion. Non- performing commercial property loans caused a majority of the failures, said Chip MacDonald, a partner specializing in financial services at law firm Jones Day.
“Somebody that has a lot of CRE exposure is going to be held to a higher standard” to redeem TARP preferred shares, said Paul Miller, a former bank examiner and now an analyst with FBR Capital Markets in Arlington, Virginia. “You’ve got to be careful they don’t allow these guys to pay back TARP, and then a year goes by and have to give it back to them.”
Commercial real estate loans “absolutely could be a factor” in whether regional banks can repay TARP funds, Bair said in an interview on Dec. 4.
Regional Lenders
Among 35 of the biggest regional lenders that retain TARP funds, commercial real estate and construction loans average 37 percent of total loans, compared with 9.5 percent at Citigroup Inc. and Wells Fargo & Co., the two biggest U.S. banks that haven’t announced plans to repay the government, according to data compiled by Bloomberg. The figures were derived from holdings at regional lenders that still have bailout money whose stocks are listed in either the 24-company KBW Bank Index or the 50-company KBW Regional Bank Index.
Of the 35 firms, 25 hold commercial real estate and construction loans equal to 30 percent or more of their total loans, according to FDIC data; seven have more than half of their loans in commercial property.
Nine of the banks with more than 30 percent of their loans in commercial real estate won’t show a profit for 2010, including Birmingham, Alabama-based Regions Financial Corp., Columbus, Georgia-based Synovus and Zions in Salt Lake City, according to Bloomberg’s survey of analysts.
Paying Back TARP
“To pay back TARP, they need to return to profitability, and for them to return to profitability, credit problems have to start to decline,” said Gerard Cassidy, a banking analyst at RBC Capital Markets in Portland, Maine.
Losses may hamper efforts of regional lenders to compete with bigger banks, such as Bank of America, ranked first by assets and deposits. The Charlotte, North Carolina-based lender, aided by profits from brokerage services and underwriting securities at its Merrill Lynch unit, announced last week that it would pay back the $45 billion it took from the government.
If Bank of America and Wells Fargo join JPMorgan Chase & Co. in redeeming TARP preferred shares, they’ll be free to press their advantage in markets they already dominate and to declare dividends and stock repurchases without seeking government approval. Bank of America and Wells Fargo finance about half of all U.S. home loans, and the four biggest banks -- Bank of America, JPMorgan, Citigroup and Wells Fargo -- account for more than a third of all U.S. deposits.
Diversified banks are also better able to capitalize on close-to-zero borrowing costs to make money by trading currencies, commodities and other assets.
Bank Stocks
Stocks of regional banks have taken a bigger hit than their larger peers. The KBW Regional Bank Index is down 28 percent this year. Bank of America and JPMorgan have posted gains this year, while Wells Fargo has dropped 9 percent.
There are more than 8,000 banks in the U.S., most of them community and regional lenders. Regional banks typically operate in several communities or states while lacking national or international operations.
Property owners and their bankers are facing losses because the recession cut into employment and consumer spending, pushing up vacancies at office buildings, shopping centers and hotels and bringing down asset values. Commercial real estate prices may drop as much as 55 percent from their October 2007 peak, Moody’s Investors Service said last month. Office vacancy rates may approach 20 percent in 2010, according to brokers at Jones Lang LaSalle Inc. and Grubb & Ellis Co.
‘Out of Whack’
Synovus, with $968 million in TARP money and two-thirds of its loans in commercial property and construction loans -- the highest of any TARP-holding bank in the KBW Bank Index -- posted five straight quarterly losses and is projected to lose money for all of 2010.
The bank’s failures include a $220 million loan to Sea Island Co., a Georgia real estate development firm, which it renegotiated and declared non-performing in April. Last month, co-lender Wells Fargo took over the deed to Sea Island’s 3,000- acre Frederica community on St. Simons Island that features a course favored by professional golfer Davis Love III.
“We got out of whack in the last four, five years, where we were pushing for growth, trying to keep up with the herd,” said Kevin Howard, Synovus’s chief credit officer. “Real estate, in the Southeast, is where you can get the growth. We let our percentages get higher than we normally have. We are fine, really, with moving it back.”
Zions Losses
Zions, Utah’s biggest lender and recipient of $1.4 billion from TARP, has posted four straight quarterly losses, and analysts are predicting the bank won’t return to profitability next year, according to Bloomberg data. Commercial property loans make up 57 percent of Zions’ portfolio, second-highest among banks in the KBW Index that haven’t repaid the government.
Collateral values are “stabilizing,” and while losses are expected to “increase somewhat,” they will be “extremely manageable” when compared with earnings, bank spokesman James Abbott said in an e-mail.
Other regional banks have seen defaults on projects ranging from a condominium-conversion project in Racine, Wisconsin, that was foreclosed on by Milwaukee-based Marshall & Ilsley Corp., the state’s biggest bank, to a subdivision in Oregon inspired by J.R.R. Tolkien’s “The Lord of the Rings.”
The Shire
Umpqua Holdings Corp., the Portland, Oregon-based bank that has 66 percent of its loans tied up in commercial property, sank $3.4 million into the Shire, a development in Bend, Oregon, with homes that have artificial thatched roofs modeled on the hobbit community in Tolkien’s trilogy. The developer defaulted in July, according to Oregon’s Bend Bulletin newspaper.
Umpqua CEO Raymond Davis said that while the bank did not experience a “significant loss” on the Shire, its real estate portfolio was “showing signs of weakness.” The bank has the highest commercial-property loan ratio of any lender in the regional bank index still holding TARP funds.
Davis said that Umpqua has set aside cash to repay the $214 million in TARP funds that it took from the government last year and is waiting for the economy to show further signs of stabilization before returning the money.
The worst may still be ahead for regional banks, according to Moody’s, which calculated that the non-performing loan ratio for commercial mortgages is higher than for residential ones.
“The commercial real estate problem is looming, and a bit like the rat going through the snake,” said William Bartmann, CEO of Bartmann Enterprises in Tulsa, Oklahoma, and former chairman of Commercial Financial Services, which was among the first companies to purchase assets from regulators during the savings and loan crisis. “We can see that it’s coming, it just hasn’t shown up yet.”
To contact the reporters on this story: Elizabeth Hester in New York at ehester@bloomberg.net; Linda Shen in New York at lshen21@bloomberg.net.
Last Updated: December 6, 2009 20:00 EST
Opel’s Reilly Gets Chance to Shine as Dark Horse for GM Top Job
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By Seonjin Cha and Chris Reiter
Dec. 7 (Bloomberg) -- Nick Reilly took over at Adam Opel GmbH in Germany five days after 10,000 people demonstrated against General Motors Co.’s ownership of the unit. It wasn’t the first time GM had asked him to win over protesters.
Reilly, 59, became acting head of Opel on Nov. 10 after GM scrapped a sale of the Ruesselsheim, Germany-based unit to Magna International Inc. Unions had backed the deal as workers would get a 10 percent stake. GM’s acting Chief Executive Officer Ed Whitacre made the appointment permanent on Dec. 4.
To turn Opel around, Reilly, a 34-year GM veteran, has to persuade workers to give up 265 million euros ($394 million) in annual pay and get seven European Union countries to provide 2.7 billion euros of support. He also has to stem a 9.6 percent slump in sales of Astra and Corsa cars as the automaker is set to run out of cash by March.
Fixing the carmaker is “all about regenerating team spirit and a determination to win,” Reilly said in an e-mail response to questions. Opel has “a very robust product portfolio.”
Reilly, who previously managed all of GM’s international operations from Shanghai, oversaw the carmaker’s 2002 purchase of South Korean plants in a deal also opposed by unions. As head of GM Daewoo Auto & Technology Co., he more than tripled annual sales to 1.5 million vehicles by the end of 2006. The unit, built from a formally bankrupt carmaker, now accounts for about 20 percent of GM’s global production.
Opel Job Cuts
“GM counts on Reilly to be one of the leaders to turn around the whole company,” said Michael Dunne, president of consultant Dunne & Co. and ex-head of J.D. Power & Associates in China. “His appointment to make sure the Opel deal works is an indication of how much confidence GM has in him.”
At Opel, Reilly expects to cut about 8,300 jobs under an almost-completed turnaround plan, he said in a Dec. 5 conference call. Success will require developing a new “mini” car, as well as hybrid and gas-powered vehicles, he said.
The unit has been losing market share since the mid-1990s, “due to cheap manufacturing and cheap parts, hurting its reputation” said Christoph Stuermer, an analyst with research firm IHS Global Insight in Frankfurt. If Reilly thinks “it’s a problem of scale -- selling more cars and saving a bit more -- then he doesn’t understand the structural problems.”
This year, Opel’s sales have contracted at almost double the pace of the 5 percent decline in the overall market this year, according to the European Automobile Manufacturers’ Association. The carmaker has lost market share to Volkswagen AG, Ford Motor Co. and Fiat SpA even as government incentives in Germany, the U.K., France and Italy boosted demand for its bread-and-butter small cars.
‘Refreshingly Pragmatic’
U.K.-born Reilly will have to win backing for a 3.3 billion euro turnaround from countries including Germany, the U.K. and Spain, which house plants making Opel or Vauxhall cars. Detroit- based GM is putting in 600 million euros.
“Reilly seems refreshingly pragmatic,” said Hendrik Hering, economy minister of the Germany state of Rhineland- Palatinate, where Opel employs 3,200 staff. “He has gathered experience in turning companies around and what also helps is that he’s European.”
Reilly was GM’s European vice president for sales and marketing, based in Zurich, before moving to Korea. He also ran Vauxhall in the U.K. and worked in the U.S., Mexico and Belgium.
To win support from Opel’s 50,000 workers, GM may give staff a stake and agree to profit-sharing, Reilly told reporters on Dec. 4. Reilly took over at Opel from Carl-Peter Forster after GM canceled a sale of the unit to Aurora, Ontario-based parts-maker Magna and Russia’s OAO Sberbank.
GM CEO?
“GM realized that things need to be straightened out,” said Klaus Franz, a union leader, who met Reilly on his first day at Opel over coffee at the unit’s headquarters. “He seems like a person that can stand up for his own opinion, even within GM.”
Reilly’s move to Opel, after serving as Asia-Pacific chief from 2006, and head of all operations outside of North America from July, has led to speculation he could be a candidate to succeed Fritz Henderson and Whitacre as GM’s CEO.
“He’d have to be among the people being looked at,” said George Peterson, president of AutoPacific Inc., an industry consultant in Tustin, California. “He was groomed for the position with the role he had in Asia.”
Still, Peterson said a “dark horse candidate” seemed likely. Several GM directors favor appointing an outsider, according to a person familiar with the situation.
Mountain Hike
In Korea, Reilly built relations with workers through moves including hiking up Mount Bongcheon, west of Seoul, with a union leader to perform good luck rituals, according to his Korean- language memoirs, “CEO Nick Reilly, Passion” (Hans Media, 2007). The University of Cambridge graduate also often sang in karaoke bars with colleagues and reporters.
“He certainly differentiated himself from former Korean managers and actively communicated with workers,” said Kim Yun Bog, a spokesman for GM Daewoo’s labor union.
Reilly helped revived sales at Daewoo by introducing new or revamped models, such as the Tosca sedan and Matiz compact, and the unit became GM’s global hub for developing small vehicles and minicars.
“Reilly’s proven himself after successfully reconstructing Daewoo,” said Lee Jin Sik, a Seoul-based analyst at CSM Worldwide Inc. “He may be the perfect troubleshooter to deal with the chaotic situation at Opel.”
To contact the reporters on this story: Seonjin Cha in Seoul at scha2@bloomberg.net; Chris Reiter in Berlin at creiter2@bloomberg.net
Last Updated: December 7, 2009 04:50 EST
Lithium for 4.8 Billion Electric Cars Lets Bolivia Upset Market
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By Michael Smith and Matthew Craze
Dec. 7 (Bloomberg) -- The wind whips across a 3,900-square- mile expanse of salt on a desert plateau in Bolivia’s Andes Mountains. Plastic washtubs filled with an emerald-colored liquid rich in lithium dot the Uyuni Salt Flat, all the way to the volcanoes on the horizon.
Waist-high slabs of salt are piled around a pond that’s shimmering in the sun. Francisco Quisbert, an Indian peasant leader known as Comrade Lithium, sits inside a crumbling adobe building on the edge of the desert. He’s explaining how Bolivia, South America’s second-poorest country, will supply the world with lithium, which will be used in batteries that power electric cars.
“We have this dream,” Quisbert, 65, says. “Lithium could bring us prosperity.”
The world’s largest untapped lithium reserve -- containing enough of the lightest metal to make batteries for more than 4.8 billion electric cars -- sits just below Quisbert’s feet, according to the U.S. Geological Survey.
The automobile industry plans to introduce dozens of electric models with lithium batteries in the next three years. Bolivian President Evo Morales says his country can become one of the world’s biggest suppliers of lithium, making the nation of 10 million people a major player in the drive to cut the use of fossil fuels.
Even with its massive reserves, Bolivia has never built a lithium mine.
‘Lithium Is the Hope’
“Lithium is the hope not only for Bolivia but for all the people on the planet,” says Morales, who, according to polls, was probably elected to a second term in elections yesterday.
If Morales gets his way, he will upset a market now controlled by two publicly traded companies: Princeton, New Jersey-based Rockwood Holdings Inc., which is 29 percent owned by Henry Kravis’s KKR & Co., and Santiago-based Sociedad Quimica y Minera de Chile SA, or Soquimich.
These two companies produce about 70 percent of the world’s low-cost lithium from a salt flat in Chile, just across the Andes from Bolivia.
Investors are wooing President Morales to be partners in building a Bolivian mine. French billionaire Vincent Bollore, South Korea’s LG Corp. and Japan’s Mitsubishi Corp. and Sumitomo Corp. offered to join with Morales in the project. They’re already helping the government at no cost to design the mine.
So far, Morales has rebuffed outside investment, saying he wants to keep lithium in government hands to provide local Indians with jobs. Morales says he may change his mind if Bolivia can’t raise the $800 million it would cost for construction of a mine and processing plants.
‘Like Saudi Arabia’
“If the Bolivian state had the money, it would invest it,” he says. “If the state doesn’t have cash, then we’re going to look for investment.”
Quisbert, the orphaned son of a llama herder, helped persuade Morales in 2007 to pledge $6 million to start work on what could be the largest lithium mine in the world by 2014, says Saul Villegas, who oversees lithium reserves at state-owned mining company Corporacion Minera de Bolivia. Bolivia has 35 percent of the world’s lithium resources, according to the USGS.
“Bolivia could become like Saudi Arabia,” says Gabriel Torres, an economist for Moody’s Investors Service Inc. in New York. “It has a huge amount of the world’s reserves.”
Carmakers are betting that electric vehicles built to run on lithium batteries will help the industry recover from its worst crisis in three decades. U.S. President Barack Obama’s administration is providing $11 billion in loans and grants to car and battery makers to reduce the country’s dependence on foreign oil.
42 New Models
The world’s auto companies plan 42 new electric models by 2012, according to an October study by PricewaterhouseCoopers LLP. Instead of running on gasoline, these vehicles will be powered by lithium batteries that are charged with electricity made in plants fueled by coal, natural gas, nuclear power, solar power and wind.
General Motors Co. says electric cars are critical for the once-mighty carmaker to restore its technical edge after it filed for bankruptcy in 2009. Electric models, such as the Volt, will help GM meet U.S. standards requiring automakers to increase the average mileage of their fleets as much as 40 percent by 2020.
“The Volt remains our top priority as far as advanced technology goes,” GM Vice Chairman Bob Lutz says. The company expects the Volt to get the equivalent of 230 miles (370 kilometers) per gallon (3.8 liters) of gasoline.
Treating Depression
By 2020, one in 10 cars manufactured -- or more than 6 million vehicles -- may be powered by lithium batteries, says Carlos Ghosn, chief executive officer of Nissan Motor Co. Car battery sales could jump to $103 billion a year in the next two decades, up from $100 million a year as of October 2009, according to a report by Credit Suisse Group AG. Ventures backed by A123 Systems Inc., Dow Chemical Co. and Johnson Controls Inc. are planning to ramp up production of lithium car batteries or cells.
About 75 percent of commercial lithium is still used for other things: It helps make glass and ceramics heat resistant, it’s a lubricant and it’s used in a drug to treat depression.
No other metal is better at holding a charge and dissipating heat with as little weight, making lithium the best ingredient known to make batteries for electric cars. Such batteries use a derivative called lithium carbonate to hold electricity they get when plugged into an outlet to be charged.
“Lithium is a very important commodity for the battery,” Ghosn says. “Obviously, we’re going to need to import a lot of it. Countries that have reserves of lithium are going to benefit.”
‘Could be a Rush’
Companies such as Apple Inc., Hewlett-Packard Co. and Nokia Oyj started using rechargeable lithium ion batteries a decade ago, and today they are in millions of iPods, computers and mobile phones.
“There could be a rush to grab up supplies of lithium,” says Alex Molinaroli, president of Johnson Controls Power Solutions, part of the world’s biggest car battery maker. “You’ll see different folks positioning themselves to secure rights to lithium in the future.”
Still, electric cars are a gamble. No one knows how many consumers will buy them, and they’re a long way from performing like gasoline-powered vehicles. GM’s Volt, planned for production in 2010, can go only 40 miles before its battery is drained. Then, a gasoline-powered generator kicks in. An owner can recharge the battery by plugging it into an electrical outlet at home.
Starting the Mine
Bolivia’s desolate salt flats are at the center of a global rush for lithium. Villegas, the state mining company executive, says a processing plant will start making lithium carbonate in 2010.
By 2014, the mine will produce 30,000 metric tons of lithium carbonate, more than Rockwood’s mine in Chile, which is the world’s second largest. Bolivian scientists say there are about 95 million tons of lithium under the Uyuni Salt Flat, more than 12 times Chile’s reserves. Car and battery companies want a piece of the action. Bollore and his friend, French President Nicolas Sarkozy, have met with Morales to discuss lithium. Bollore, who controls a multibillion-dollar banking, media and shipping empire, owns a lithium battery plant in France and plans to build electric cars.
In February 2009, Morales, during a state visit to France, test-drove Bollore’s Bluecar. Bollore then told Morales they would fund a $5 million study for a mine and help finance construction of a lithium-processing plant.
‘The 21st and 22nd Century’
“It’s you who controls the raw materials for the 21st and 22nd centuries,” Bollore told Morales, according to a videotape of the meeting. “You are like Saudi Arabia.”
Bolivia is up against big odds, says Eduardo Morales, manager of Rockwood’s mine in Chile’s Atacama Salt Flat. Bolivia’s salt flat has few paved roads, and most communities don’t have electricity. The country is landlocked; the nearest port is across the Andes, hundreds of miles away in Chile. And Bolivia has no experience mining lithium.
“They will need outside investors,” says Morales, a Chilean national unrelated to Bolivia’s president.
Rockwood and Soquimich can sell lithium for about three times what it costs to produce because, until now, production hasn’t been able to keep up with demand, says Brian Jaskula, a lithium specialist at the USGS in Reston, Virginia.
Evaporating Pools
On Chile’s Atacama Salt Flat in the driest desert on Earth, Rockwood and Soquimich produce lithium from evaporating pools that stretch for miles across a sea of formations made of salt. They create those ponds by pumping out lithium-rich water, and then wait 18 months for most of it to evaporate.
Then, they process the remaining liquid into powdered lithium carbonate. It costs about $1 to produce a pound (454 grams), Rockwood’s Morales says. Rockwood and Soquimich sell the powder for about $3 a pound.
“This is a good business, and here’s the money, right here,” says Eduardo Morales, standing at a 1,000-foot-wide (300-meter-wide) pool filled with lithium-bearing water that looks and feels like olive oil at Rockwood’s mine in Chile.
Rockwood and Soquimich have big sway over prices because they have few competitors.
“That’s what this market is,” Jaskula says. “It’s dominated by one or two big players.”
Lithium Carbonate Prices Jump
Kravis’s KKR created Rockwood in 2000 with the acquisition of U.K.-based Laporte Plc’s specialty chemical business, and four years later acquired the lithium mine by purchasing Chemetall Plc. Under CEO Seifi Ghasemi, Rockwood boosted annual revenue fourfold, to $3.4 billion in 2008.
KKR took Rockwood public in 2005 and reduced its 100 percent stake to 29 percent. KKR co-founder Kravis declined to comment.
In 2009, lithium carbonate prices jumped to $6,500 a metric ton, almost tripling 2006 values, because of surging demand for batteries, Jaskula says.
Swedish pharmaceutical researcher Johan August Arfvedson discovered lithium in 1817. It wasn’t until 1923 that German steelmaker Metallgesellschaft AG began producing lithium on an industrial scale. Bolivia’s government and USGS geologists discovered lithium beneath the Uyuni Salt Flat in 1976.
Quisbert inspired Bolivia to move to the center stage of the market. The orphan took off on his own at the age of 12 to dig minerals by hand from the salt flats of South America’s Andes Mountains.
Generating Jobs
By the time he was in his 20s, in the 1960s, Quisbert was organizing farmers to pressure for jobs and better living conditions.
Quisbert says he became convinced that Uyuni’s lithium, if mined by the government, would generate jobs and revenue that could bring prosperity to the impoverished Indian families who live in mud huts amid the desolation of the salt flat.
Quisbert envisions lithium bringing power to a place where electricity is a luxury. He grew up around Uyuni, which is one of Bolivia’s poorest regions. It’s inhabited by subsistence farmers and llama herders who tend small farms with no electricity. Towns around the salt flat have frequent power outages.
“Roads and electricity come with a lithium mine,” says Quisbert, whose face is tanned and wrinkled from a life in the intense sun of Uyuni. “We still live with candles, with oil lamps.”
Lobbying Government
In the 1980s, Quisbert lobbied the government, unsuccessfully, to construct a mine. In 1991, he organized street protests to successfully block plans by Philadelphia- based FMC Corp. and Soquimich to build a lithium mine in Uyuni. FMC gave up and opened a mine across the border in Argentina.
In 2005, Quisbert’s friend, Morales, was elected as the first Indian president of Bolivia. Morales had grown up poor, like Quisbert, in Bolivia’s Andes, working on farms since the age of 6.
The two men first met in the 1980s, when Morales led Bolivia’s biggest coca farmers union.
As Quisbert pushed for a government-run lithium mine, Morales organized protests that helped to force two presidents from office because they had allowed oil companies to exploit Bolivia’s natural gas reserves.
Both men believed that foreigners had looted Bolivia’s riches, starting with Spanish conquistadors five centuries before, leaving its Indian majority in poverty.
Presidential Palace
Today, Bolivians have an annual per-capita income of $1,716, according to the International Monetary Fund. Bolivia is the second-poorest nation in South America, after Guyana.
“He was fighting for coca; I was fighting for lithium,” Quisbert says.
In November 2007, Quisbert walked into the presidential palace in La Paz, past guards dressed in red uniforms. It was 5 a.m., when the president routinely starts his workday, and Quisbert sat down in the palace’s Room of Mirrors to propose that the government mine lithium.
Morales, who calls Quisbert Comrade Lithium, agreed within minutes, saying the project would provide jobs.
“The president was very enthusiastic,” says Quisbert, who in turn calls Morales Comrade Coca.
The president chose two of Quisbert’s friends and advisers to lead the lithium program. One was Villegas, a tattooed, 34- year-old union leader who’d worked for years with Quisbert, to oversee lithium mining.
Planning the Project
Belgian physicist Guillaume Roelants, who had spent 28 years mining southwest Bolivia and teaching Indians how to farm and mine, was charged with planning the project.
On the Uyuni Salt Flat, engineers fill metal and plastic containers with brine to test how quickly it will evaporate. Workers are building a small plant to test how to process lithium carbonate.
Roelants, the mine planner, is working with car and battery makers who could become investors to solve the challenges of building a lithium mine from scratch.
He set up a committee that includes French mining company Eramet SA; state-owned Japan Oil, Gas & Metals Corp.; South Korea’s LG Chem and state-owned mining company Korea Resources Corp.; Brazil’s Ministry of Science and Technology; and Bollore. University researchers in Brazil and South Korea, working with the committee, are studying how to process the lithium.
Thierry Marraud, Bollore’s chief financial officer, has technicians testing brine samples. Researchers at Paris-based Eramet are seeking ways to separate magnesium impurities from the brine.
‘Huge Potential’
“We are going to try to evaluate the total potential, which is huge,” Roelants says.
Bolivia is looking, for the first time in its history, to take over bragging rights from Chile. Quisbert is convinced Bolivia can succeed. He sits in his office in a dusty desert town, backed by a portrait of President Morales and the checkered flag of Bolivia’s Indians.
For decades since geologists discovered the Bolivian reserve, political opposition and a lack of funds have gotten in the way of developing it. Quisbert says that will change.
“We want a different Bolivia,” he says. “We want development in our country.”
Battery and car companies around the world are hungry to tap into Bolivia’s massive reserves of lithium. The country is betting that lithium can turn it into a global force in the auto industry.
The odds are stacked against it because of its poverty, politics and lack of know-how. If Bolivia chooses to partner with investors from around the world, it may yet become the Saudi Arabia of lithium.
To contact the reporters on this story: Michael Smith in Santiago at Mssmith@bloomberg.net Or Matthew Craze in Santiago at mcraze@bloomberg.net.
Last Updated: December 7, 2009 00:00 EST
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Most Japan Stocks Fall; Topix Advances Most in Week Since 1992
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By Akiko Ikeda and Kotaro Tsunetomi
Dec. 4 (Bloomberg) -- Most Japanese stocks fell as an unexpected contraction in U.S. service industries raised concern the economic recovery is fragile and Takefuji Corp. plunged on speculation the consumer lender is short of funds.
Inpex Corp., Japan’s largest oil explorer, lost 2.1 percent, as crude prices dropped after the U.S. Institute for Supply Management’s index of non-manufacturing businesses missed the median economist estimate. Takefuji Corp. lost 9.4 percent after the Asahi newspaper said the lender is limiting loans because of a funding shortage. Canon Inc., the world’s largest camera maker and which gets about 80 percent of its revenue abroad, climbed 2.8 percent after the dollar strengthened against the yen.
About twice as many stocks declined as advanced on the Topix index, which added 0.2 percent to 889.58 at the 3 p.m. close in Tokyo. It had a weekly gain of 9.7 percent, the most since August 1992. The Nikkei 225 Stock Average rose 0.5 percent today to 10,022.59, its first close above 10,000 since Oct. 30.
“Investors are expecting sentiment to start improving,” said Masayuki Kubota, who oversees the equivalent of $1.7 billion in assets in Tokyo at Daiwa SB Investments Ltd. “Measures taken by the government and the central bank are supporting stocks.”
Japan’s main equity benchmarks both climbed every day this week, swelling the average price of companies in the Topix to 37 times estimated earnings, compared with 17 times for the Standard & Poor’s 500 Index in the U.S. and 16 times for the Dow Jones Stoxx 600 Index in Europe.
Dollar-Yen
For the year, the Topix has added 3.5 percent, the lowest return among equity benchmarks in the world’s 40 largest markets. Stocks have been dogged by concern a strengthening yen will erode the value of overseas earnings at Japanese companies and that the government will fail to revive economic growth.
“Everything depends on the U.S. dollar-yen rate,” said Diane Lin, a Sydney-based fund manager at Pengana Capital Ltd., which oversees about $1.1 billion. “We want to know if the Bank of Japan or the government will do something to increase liquidity and weaken the yen.”
The yen has averaged 93.84 against the dollar in 2009, the strongest since currencies began trading freely in 1971. The Japanese currency retreated to as low as 88.42 against the dollar today from a 14-year high of 84.83 last week.
Canon climbed 2.8 percent to 3,630 yen, and Fanuc Ltd., a maker of industrial robots which earns about 70 percent of its revenue outside Japan, added 2 percent to 7,790 yen as the currency weakened. Canon was the biggest contributor to the Topix’s gain, while Fanuc was the biggest boost to the Nikkei.
10 Trillion Yen
Japan’s equity benchmarks advanced this week as the yen weakened on speculation the Bank of Japan would take measures to limit the currency’s appreciation. The central bank announced a 10 trillion-yen ($113 billion) credit program on Dec. 1 amid government calls for it to combat falling prices.
Prime Minister Yukio Hatoyama is preparing his first stimulus package amid growing signs that the recovery in the world’s second-largest economy is losing momentum, Finance Ministry officials familiar with the matter said.
Takefuji plunged 9.4 percent to 386 yen after the Asahi newspaper said the consumer lender provided 1.5 billion yen in loans last month, less than its 10 billion yen monthly target. Acom Co. slumped 2.8 percent to 1,224 yen. Fifteen of 22 companies dropped in the Topix’s sub-index that includes consumer lenders.
Inpex lost 2.1 percent to 668,000 yen. Japan Petroleum Exploration Co., Japan’s second-biggest oil driller, declined 1.7 percent to 4,040 yen, its first drop in five days.
Crude oil for January delivery dropped as much as 1.1 percent to $75.61 a barrel in electronic trading in New York today. That extended a slump yesterday, when the Institute for Supply Management said its index of non-manufacturing businesses that make up almost 90 percent of the U.S. economy sank to 48.7 in November. That compared with economists’ estimate of 51.5. Fifty is the level that divides expansion from contraction.
“The weak economic indicator in the world’s biggest economy should spur a sell-off,” said Hiroichi Nishi, an equities manager at Nikko Cordial Securities Inc. in Tokyo.
To contact the reporters for this story: Akiko Ikeda in Tokyo at iakiko@bloomberg.net; Kotaro Tsunetomi at ktsunetomi@bloomberg.net.
Last Updated: December 4, 2009 03:42 EST
Asian Stocks Drop as U.S. Services Report Dims Recovery Hopes
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By Shani Raja
Dec. 4 (Bloomberg) -- Asian stocks fell, dragging the MSCI Asia Pacific Index from a 15-month high, as an unexpected contraction in U.S. service industries sparked concern about the strength of the global economic recovery.
Rio Tinto Group, the world’s third-biggest mining company, dropped 2.3 percent in Sydney, as metal prices slid after a U.S. index of non-manufacturing businesses missed the median economist estimate. James Hardie Industries NV, the top seller of home siding in the U.S., slumped 3.8 percent. Li & Fung Ltd., the biggest supplier of clothes and toys to Wal-Mart Stores Inc., fell 3.8 percent in Hong Kong.
“Markets have had a great run in anticipation of a recovery,” said Matt Riordan, who helps manage about $5.1 billion at Paradice Investment Management in Sydney. “When you have data that’s not as supportive as you’d hoped, or which suggests the recovery might be taking longer than anticipated, it makes people a bit nervous.”
The MSCI Asia Pacific Index fell 0.3 percent to 121.28 as of 7:31 p.m. in Tokyo, after yesterday climbing to the highest level since Sept. 1, 2008. The gauge has advanced 6.5 percent this week, the steepest weekly gain since the period ended May 8. The index has rallied 72 percent from a five-year low on March 9 amid signs government stimulus measures are reviving global growth.
Japan’s Nikkei 225 Stock Average gained 0.5 percent as speculation mounted that Prime Minister Yukio Hatoyama will today unveil a stimulus package. The broader Topix index added 0.2 percent, completing its best week since August 1992.
Stimulus Package
Hong Kong’s Hang Seng Index dropped 0.3 percent. Anhui Tianda Oil Pipe Co. tumbled 6.8 percent after saying it plans to sell new shares. Zijin Mining Group Co., China’s biggest gold producer, sank 2.5 percent in Shanghai as gold prices declined. The Shanghai Composite Index rose 1.6 percent as bank capital- raising concerns eased.
Australia’s S&P/ASX 200 Index fell 1.5 percent, while New Zealand’s NZX 50 Index retreated 0.2 percent in Wellington. South Korea’s Kospi Index gained 0.6 percent.
Futures on the U.S. Standard & Poor’s 500 Index added 0.2 percent. The gauge fell for the first time in four days yesterday, losing 0.8 percent. The Institute for Supply Management’s index of businesses that make up almost 90 percent of the U.S. economy sank to 48.7 in November, compared with a median estimate of 51.5 by 71 economists. Fifty is the dividing line between expansion and contraction.
Economic Indicator
James Hardie, which gets more than three-quarters of its revenue from North America, sank 3.8 percent to A$8.18. Its shares rose 3.2 percent yesterday after the Federal Reserve said the U.S. economy had improved. Li & Fung fell 3.8 percent to HK$33.25 in Hong Kong.
“The weak economic indicator in the world’s biggest economy should spur a sell-off,” said Hiroichi Nishi, an equities manager at Nikko Cordial Securities Inc. in Tokyo.
Rio dropped 2.3 percent to A$71.85. The London Metal Exchange Index, a measure of six metals including copper and zinc, dropped 1 percent yesterday, breaking a three-day winning streak. BHP Billiton Ltd., the world’s largest mining company, lost 2.5 percent to A$41.40. Korea Zinc Co. lost 1.8 percent to 215,500 won in Seoul.
Zijin Mining fell 2.5 percent to 10.74 yuan as gold for immediate delivery dropped for a second day. Bullion pared a weekly advance, on speculation that signs of a slowing recovery will boost the dollar and as record prices deter investors. In Sydney, Newcrest Mining Ltd., Australia’s largest gold producer slid 2.3 percent to A$38.30.
Slowing Recovery
The MSCI Asia Pacific Index’s rally from its March low has outpaced gains of 63 percent by the S&P 500 and 56 percent for Europe’s Dow Jones Stoxx 600 Index. Stocks in the benchmark are valued at 22 times estimated earnings, compared with 17 times for the S&P and 16 times for the Stoxx.
The Asian gauge’s gain this week has come as Chinese manufacturing grew at the fastest pace in five years and amid optimism the region’s companies will be sheltered from losses related to Dubai World, which last week sought to restructure its debt.
Dubai World only sought to delay payments on less than half its $59 billion of liabilities, easing the potential damage to banks recovering from $1.7 trillion of losses and writedowns from the global crisis. Hitachi Ltd., a maker of products ranging from washing machines to nuclear reactors, surged 4.2 percent 246 yen. Today is the last day before the company begins to set the price of new stock to be sold to pay debt and invest in facilities.
‘Positive Signs’
Sony Corp. rose 1.4 percent to 2,510 yen. The Japanese electronics maker saw “very positive signs” for sales of TVs, personal computers, PlayStation 3 game consoles and Blu-ray discs during the Thanksgiving week in the U.S., Chairman Howard Stringer told reporters yesterday.
Japan Airlines Corp. surged 8.7 percent to 100 yen after American Airlines proposed a $1.1 billion investment to keep it in the Oneworld alliance.
Japan’s Hatoyama, who took office in September, may propose spending as much as 4 trillion yen ($46 billion) in this year’s extra budget, Finance Ministry officials familiar with the matter said. The plan is likely to focus on helping small and medium-sized businesses, employment aid, and incentives to buy environment-friendly goods.
The Japanese government will report slower economic growth for the July-September quarter than the 4.8 percent estimated previously when it announces revised figures on Dec. 9, the Nikkei newspaper said, without saying where it got the information.
Biggest Threat
“Right now, the biggest threat for the economy is the strengthening yen, while deflation also poses a very severe risk,” said Yoshimasa Maruyama, senior economist at Itochu Corp. in Tokyo. “The government is mindful of next year’s election and will want to spur employment because that’s what matters to voters the most.”
The yen climbed to a 14-year high against the dollar last week and has averaged 93.84 this year, the strongest since currencies began trading freely in 1971. That has weighed on the Topix, making its 3.5 percent gain in 2009 the lowest return among the world’s 40 largest stock markets.
Takefuji Corp., a consumer lender, tumbled 9.4 percent to 386 yen. The company is limiting loans because it has difficulty finding funds, the Asahi newspaper said, citing a company executive it didn’t identify.
Mitsui Fudosan Co., a property developer, dropped 1.1 percent to 1,579 yen after having its rating cut to “underperform” from “outperform” at Mizuho Securities Co.
In Hong Kong, Tianda Oil Pipe tumbled 6.8 percent to HK$4.24. The oil-pipe maker said it plans to raise a net HK$196 million ($25 million) to fund a production line by placing 50.3 million new shares at a 12 percent discount.
Brilliance China Automotive Holdings Ltd. slumped 7.4 percent to HK$2.25 after saying its controlling shareholder will cut its stake in the automaker to 45.35 percent from 55.38 percent.
To contact the reporter for this story: Shani Raja in Sydney at sraja4@bloomberg.net.
Last Updated: December 4, 2009 05:33 EST
Hochtief Shelves Toll-Unit Unit IPO, Casting Doubt on Recovery
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By Benedikt Kammel, Nicholas Comfort and Elisa Martinuzzi
Dec. 4 (Bloomberg) -- Hochtief Concessions, which failed to lure buyers to what would have been Germany’s largest initial public offering in two years, is casting doubt on whether investors will back a nascent recovery in European IPOs.
Hochtief AG, Germany’s largest builder, had sought to sell as much as 49 percent of the unit that runs toll roads and airports to raise as much as 1 billion euros ($1.5 billion). The Essen, Germany-based company shelved the offering yesterday, citing the debt crisis in Dubai and “resulting disturbances in the international capital markets.”
European share sales were rebounding from a two-year slump just as Dubai’s move to delay debt repayments sparked the biggest jump in stock-price swings since 2008. Private-equity firms are counting on share sales to let them return cash to investors by selling investments, while companies from France’s PPR SA to British insurer Aviva Plc are turning to the equity market to sell units, boost capital, or finance expansion.
“The IPO market in Europe is still limited to certain companies and certain industries,” Julie Teigland, a Frankfurt- based partner at Ernst & Young, said in an interview. “It’s so early we can’t speak of a recovery just yet. We’ll see a window opening up in the first or second quarter of next year, but it won’t be for everyone.”
The pace of IPOs has taken longer to recover in Europe than in the U.S. after New York-based Lehman Brothers Holdings Inc.’s collapse in September 2008 spurred a credit-market freeze. Nine western European companies have raised money in offerings in the region since the start of this year, compared with 42 in America, data compiled by Bloomberg show.
‘Out of the Question’
Hochtief had sought to sell the shares for 24 euros to 29 euros each. The builder said it won’t pursue the sale “for the time being” and that a cut-price sale is “out of the question.”
The decision to put the listing on hold came a week after Dubai World, the investment company burdened by $59 billion of liabilities, roiled equity markets by seeking to delay repayment of debt. The VStoxx Index, which gauges the cost of using options to protect against declines in the Dow Jones Euro Stoxx 50 Index, jumped 28 percent on Nov. 26, the biggest surge since October 2008.
Hochtief’s Mannheim-based rival Bilfinger Berger AG said today that it will determine early next year whether to go ahead with an IPO of its Australian subsidiary. K+S AG, the Kassel, Germany-based potash supplier that is in the process of raising as much as 686.4 million euros in a rights offer, today said the offer is proceeding as planned.
Positive Feedback
Scan Energy said it’s moving ahead with plans to sell shares after receiving “positive” feedback from investors. The company has set an “attractive” price range and isn’t comparable to Hochtief Concessions, Scan Energy said in an e- mailed statement.
Hochtief isn’t “a sign that you can’t hold IPOs,” said Ingbert Faust, an analyst at Equinet AG in Frankfurt. “The conditions have to be right, and what price you take it to the market has to be right. 2010 will be a new start.”
Other offerings scheduled in Germany include Brenntag Holding GmbH, a chemicals distributor owned by private-equity firm BC Partners Ltd., and Flint Group, the world’s second- biggest maker of printing ink, people familiar with the plans have said. Siemens AG said this week it may list a computer services unit after changing the legal structure of the division.
Gartmore Group
Private-equity firms are also returning after a freeze in deals following the worst financial crisis since the Great Depression.
Gartmore Group Ltd., the London-based money manager owned by leveraged buyout firm Hellman & Friedman LLC, plans to raise more than 400 million pounds ($660 million) in an IPO. San Francisco-based Hellman & Friedman, which acquired Gartmore for about 500 million pounds in 2006, may sell part of its 52 percent stake in the transaction.
Hochtief shelved its offering following a day in which CFAO SA, the African distributor spun off from Paris-based PPR, and Bologna, Italy-based fashion retailer Yoox SpA climbed in their trading debuts.
CFAO added 4 percent in Paris yesterday after its 806 million-euro IPO, France’s biggest since 2007. Yoox advanced 8.4 percent in Milan after selling 104.5 million euros of shares in Italy’s largest sale in two years. CFAO’s offering wasn’t derailed by the Dubai debt crisis, the company’s chief executive officer, Richard Bielle, said in an interview.
Middle East
Hochtief had said on Nov. 27 that it expected no material impact from Dubai’s attempt to delay debt repayments. The company operates in the Middle East partly through its Leighton Holdings Ltd. subsidiary. Leighton scrapped a 4.9 billion dirham ($1.3 billion) venture to build an additional concourse at Dubai airport in April after failing to reach an agreement with Dubai’s Department of Civil Aviation.
The construction company first said in August that it was considering an IPO for the unit, and aimed to raise between 882 million euros and 1 billion euros. Hochtief Concessions unit would also raise about 600 million euros itself in the sale.
The concessions division has stakes in airports in Sydney, Athens and four other cities, as well as toll roads in Greece and Chile. It operates tunnels, and schools in Germany and Scotland. Hochtief Concessions had assets with net present value of 1.54 billion euros as of June 30, and the unit had net income of 63.9 million euros last year.
‘No Pressure’
“Our claim has always been not to sell in any case for less than our target value,” CEO Herbert Luetkestratkoetter said in a statement. “We have always said so and continue to be under no pressure.”
Hochtief shares added 1 percent to 52.37 euros at 2:15 p.m. in Frankfurt, after falling as much as 2.4 percent earlier.
While share sales in the U.S. have outpaced Europe, four American companies have shelved offerings since Oct. 29. HealthPort Inc., the Alpharetta, Georgia-based developer of software used to manage medical records electronically, was the latest to postpone its IPO on Nov. 19.
To contact the reporter on this story: Benedikt Kammel in Berlin at bkammel@bloomberg.net; Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net; Elisa Martinuzzi in Milan at emartinuzzi@bloomberg.net.
Last Updated: December 4, 2009 08:17 EST
U.K. Stocks Cut to ‘Underweight’ by Credit Suisse Strategists
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By Adam Haigh
Dec. 4 (Bloomberg) -- The U.K. may face a “government funding crisis” next year, according to Credit Suisse Group AG equity strategists who cut U.K. stocks to “underweight.”
The benchmark FTSE 100 Index may rise as high as 5,750 by the middle of 2010 before dropping to 5,300 by year-end, the bank forecast. Credit Suisse lowered its stance on U.K. equities from a “small overweight” to “underweight” within a global stocks portfolio, the team of strategists led by London-based Andrew Garthwaite wrote.
The FTSE 100 has rebounded 51 percent from this year’s low on March 3, closing at 5,313 yesterday, as governments committed about $12 trillion and central banks cut interest rates to record lows to end the first global recession since World War II and revive credit markets. The global economy may expand 1.9 percent next year and 2.5 percent in 2011, the Organization for Economic Cooperation and Development said on Nov. 19.
“The sector composition of the stock market is skewed towards defensives -- and thus the U.K. tends to underperform when the OECD lead indicators rise,” Garthwaite wrote in the note. “Relative earnings have peaked and the U.K. looks overbought compared to other markets.”
To contact the reporter responsible for this story: Adam Haigh in London at ahaigh1@bloomberg.net
Last Updated: December 4, 2009 04:16 EST
German Stocks Extend Weekly Advance as U.S. Jobless Rate Falls
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By Cornelius Rahn
Dec. 4 (Bloomberg) -- German stocks advanced, extending their second consecutive weekly gain, after a report showed the U.S. unemployment rate unexpectedly fell from a 26-year high.
Deutsche Post AG was the best performer in the benchmark DAX Index, rising 2.6 percent. E.ON AG und RWE AG led European utilities companies higher, adding at least 1.6 percent.
The DAX added 1.2 percent to 5,837.26 as of 3:16 p.m. in Frankfurt, extending the gain this week to 2.7 percent. A 59 percent rally since March 6 has left the DAX valued at about 63 times its companies’ earnings, near the highest level since 2002, according to weekly data compiled by Bloomberg. The broader HDAX Index advanced 1.1 percent today.
“The U.S. unemployment data are a nice, positive surprise,” said Robert Halver, head of research at Baader Bank in Frankfurt. “It’s being well received and shows that after all the pain and effort the economy really is gathering steam again. Chances are good for a year-end rally because I believe many investors still want to position themselves.”
U.S. payrolls dropped by 11,000 workers in November, the smallest decrease since the recession began, while the jobless rate declined to 10 percent, figures from the U.S. Labor Department showed today.
Germany’s Bundesbank raised its 2010 growth forecast for Europe’s largest economy to 1.6 percent from the zero growth it predicted in June, saying the outlook for the next two years has “brightened perceptively.”
Deutsche Post rose 2.6 percent to 13.63 euros. The mail carrier was headed for its highest close since October 2008. E.ON and RWE, Germany’s biggest utilities, rose 1.9 percent to 27.93 euros and 1.6 percent to 64.32 euros, respectively.
MAN, Volkswagen
MAN SE added 1.9 percent to 53.84 euros. Europe’s third- largest truckmaker is acquiring a majority of truck leasing company Euro-Leasing and has applied to the Federal Cartel Office for approval for the deal, Reuters reported, citing an unidentified MAN spokesman.
Volkswagen AG increased 2 percent to 82.11 euros, climbing for a second day. Shareholders of Europe’s biggest carmaker approved the sale of as many as 135 million non-voting preferred shares in the next five years to help fund the purchase of Porsche SE’s car-making operations, company spokesman Peik von Bestenbostel said late yesterday.
The following shares rose or fell in German markets. Stock symbols are in parentheses.
Biotest AG (BIO3 GY) added 2.9 percent to 35.81 euros, headed for its first weekly gain in more than a month. The German biotechnology company said it can start marketing its Zutectra drug in all European Union countries after the European Commission granted it approval.
Hochtief AG (HOT GY), Germany’s largest construction company, climbed 2.3 percent to 53.03 euros, ending two days of losses. Hochtief’s Leighton unit has won two orders in Australia valued at a total of about 283 million euros ($423 million), the company said today.
Manz Automation AG (M5Z GY) rose for a second day, adding 2 percent to 58.16 euros. The German solar-cell machine maker was raised to “add” from “hold” at Commerzbank AG, which cited “improved fundamentals” in a report to clients today.
Roth & Rau AG (R8R GY) surged 7.8 percent to 29.21 euros, poised for a third straight weekly gain. Commerzbank lifted its share-price estimate for the German maker of equipment used to coat solar panels to 32 euros from 26 euros.
To contact the reporter on this story: Cornelius Rahn in Frankfurt at crahn2@bloomberg.net
Last Updated: December 4, 2009 09:31 EST
U.K. Stocks Rise, Extending Weekly Gain; Rio Tinto Leads Rally
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By Adam Haigh
Dec. 4 (Bloomberg) -- U.K. stocks rose, with the FTSE 100 Index extending this week’s advance, after a government report showed the U.S. rate of unemployment declined in November.
Rio Tinto Group, the world’s third-largest mining company, and BP Plc led a rally among raw-material producers as the U.S. cut the fewest jobs last month since the recession began.
The benchmark FTSE 100 Index climbed 31.71, or 0.6 percent, to 5,344.71 at 1:49 p.m. in London, bringing this week’s gain to 1.9 percent. The measure has rebounded 52 percent from its low on March 3 as governments committed about $12 trillion and central banks cut interest rates to record lows to end the global recession and revive credit markets. The FTSE All-Share Index increased 0.5 percent today, while Ireland’s ISEQ Index advanced 1 percent.
“You absolutely still want to be in equities,” said Julian Chillingworth, who helps manage the equivalent of $17.4 billion as chief investment officer at Rathbone Unit Trust Management in London. “As long as we don’t see a tightening by the Federal Reserve by the third quarter of next year then equities are absolutely fine.”
U.S. payrolls fell by 11,000 workers, less than the median estimate of economists surveyed by Bloomberg News, figures from the Labor Department showed today in Washington. The jobless rate declined to 10 percent.
Rio Tinto gained 2.4 percent to 3,258.5 pence. BP, Europe’s second-biggest oil producer, rose 1.1 percent to 588.7 pence.
‘Funding Crisis’
Berkeley Group Holdings Plc tumbled 3.7 percent to 859 pence. The third-largest U.K. homebuilder by market value said first-half profit declined 35 percent to 37 million pounds ($61 million) in the six months ended Oct. 31 after the company sold cheaper properties.
The U.K. may face a “government funding crisis” next year, according to Credit Suisse Group AG equity strategists who cut U.K. stocks to “underweight.” The FTSE 100 may rise as high as 5,750 by the middle of 2010 before dropping to 5,300 by year-end, the bank forecast. Credit Suisse lowered its stance on U.K. equities from a “small overweight” to “underweight” within a global stocks portfolio.
To contact the reporter on this story: Adam Haigh in London at ahaigh1@bloomberg.net.
Last Updated: December 4, 2009 09:00 EST
European Stocks Jump After U.S. Jobless Rate Unexpectedly Drops
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By Adria Cimino
Dec. 4 (Bloomberg) -- European stocks surged, with the Dow Jones Stoxx 600 Index extending its weekly gain, after a report showed U.S. employers cut the fewest jobs in November since the recession began and the unemployment rate unexpectedly declined.
Randstad Holding NV, the world’s second-biggest temporary staffing company, climbed 7.7 percent after saying its U.S. business returned to growth. Baloise Holding AG, Switzerland’s third-largest insurer, rallied the most since August after UBS AG recommended buying the stock.
The Dow Jones Stoxx 600 Index of European companies jumped 1.5 percent to 250.07 at 3:44 p.m. in London, after earlier falling as much as 0.6 percent. The measure has advanced 3 percent this week as reports also signaled manufacturing in China and Europe expanded.
Payrolls in the U.S. dropped by 11,000 workers, less than the median estimate of economists surveyed by Bloomberg News, figures from the Labor Department showed today in Washington. The jobless rate fell to 10 percent, signaling the economic recovery is lifting the labor market out of the worst slump since World War II.
“This is an encouraging sign,” said Pierre-Alexis Dumont, a fund manager at OFI Asset Management in Paris, which oversees about $28 billion in assets. “It can allow the market to take off without the support of government stimulus plans. The main problem has been the idea of the loss of jobs weighing on spending and economic growth.”
Factory Orders
A Commerce Department report today showed orders placed with U.S. factories rose in October for the sixth time in the past seven months, propelled by gains in non-durable goods that overshadowed declines in spending on new equipment.
The Stoxx 600 has rallied 26 percent this year on signs government spending and record-low interest rates are helping to drag the economy out of recession.
National benchmark indexes rose in 16 of the 18 western European markets. France’s CAC 40 advanced 1.8 percent, while Germany’s DAX climbed 1.2 percent. The U.K.’s FTSE 100 increased 0.9 percent.
Randstad Holding NV climbed 7.7 percent to 32.81 euros. U.S. staffing returned to growth for the first time in three years, the company said on its Web site today. Randstad targets revenue of more than 17 billion euros ($25.4 billion) in the mid-term, and aims to increase earnings before interest, tax and amortization to 5 to 6 percent of sales, it said.
Adecco SA, the world’s largest temporary staffing company, surged 6.6 percent to 56.3 Swiss francs.
Baloise, Heineken
Baloise added 5 percent to 88.8 francs, its biggest gain since Aug. 24. UBS raised its recommendation on the shares to “buy” from “neutral.”
Heineken NV, the world’s third-biggest brewer, advanced 2.8 percent to 33.97 euros as Petercam raised its recommendation on the shares to “add” from “hold,” saying the stock looks “cheap.”
“Brewing stocks are cash-flow machines even in a downturn,” Kris Kippers, a Petercam analyst, wrote. “With cost cuts being a driver of bottom line and volumes holding relatively well, earnings power is strong.”
Abbey Plc soared 9.1 percent to 4.80 euros. Ireland’s biggest homebuilder said it anticipates “modest profitability” this financial year. Abbey posted net income of 2.9 million euros in the six months ended Oct. 31, compared with a loss of 3.9 million euros in the year-earlier period.
To contact the reporter on this story: Adria Cimino in Paris at acimino1@bloomberg.net.
Last Updated: December 4, 2009 10:46 EST
Dividend Payments May Rise as Recovery Frees Cash (Update1)
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By Thomas Black
Dec. 4 (Bloomberg) -- One in six companies on the Standard & Poor’s 500 index may raise its next dividend payment as a rebound in the global economy boosts cash earnings.
AT&T Inc., Wal-Mart Stores Inc. and Raleigh, North Carolina-based Progress Energy Inc. are among 79 companies in the index that may boost dividends, according to data compiled by Bloomberg. An 80th company, Ecolab Inc., the world’s largest maker of cleaning chemicals for hotels and restaurants, increased its payout yesterday. About 2 percent of the members may reduce their next payment.
“The economic recovery is in place,” John Crawford, chief investment officer of Crawford Investment Counsel Inc. in Atlanta, said yesterday in a telephone interview. “With that you will see some improvement in dividends in an overall sense, but they too will be coming along at a slower pace.”
Companies that have large market share, strong finances and pay above-average dividends are attractive for investors looking for safe returns as 10-year U.S. Treasuries yield less than 3.5 percent, said Crawford, who manages $2.5 billion of securities. AT&T, based in Dallas, has a projected 12-month dividend yield of 6.1 percent and Progress, the owner of utilities in three U.S. Southeast states, is expected to pay 6.2 percent.
Dividends tend to reflect the prior year’s profits and so won’t rebound for many U.S. companies until 2011, said Kevin Shacknofsky, who manages about $2 billion for Alpine Mutual Funds in Purchase, New York.
Reversing Declines
The U.S. economy rose at a 2.8 percent annual pace in the third quarter after declines in the previous four quarters, the Commerce Department said last month. The unemployment rate, which climbed to a 26-year high of 10.2 percent in October, retreated to 10 percent last month.
Utilities, which have posted steady profits during the recession, led all sectors in projected 12-month dividend yields with 4.9 percent, according to a Bloomberg December dividend report. The communications industry was the next highest with a yield of about 4 percent, the report said. The projected 12- month yield for all companies on the S&P 500 Index that pay a dividend is about 2.1 percent.
Progress has increased its dividend every year since at least 1999 and is forecast to raise it by 0.5 cent in an announcement this month, according to the Bloomberg data. The company’s shares rose 12 cents to $40.77 at 9:54 a.m. in New York Stock Exchange trading and have gained 2.3 percent this year.
‘Integral Component’
“We recognize that our shareholders value the dividend as an integral component of the total shareholder return proposition,” Progress Energy Chief Financial Officer Mark Mulhern said in an e-mail.
AT&T strives to provide its board the financial flexibility to “consider dividend growth,” said Michael Coe, a spokesman for the largest U.S. phone company. AT&T increased 37 cents to $27.89 for a drop of 2.1 percent this year.
John Simley, a spokesman for Bentonville, Arkansas-based Walmart, declined to comment on dividend plans for the world’s largest retailer.
Some of the increases in dividends next year will be from companies that had cut payments or eliminated them this year or in 2008 because of “near-death experiences,” Shacknofsky said.
Thirty-three companies on the S&P 500 had lower dividend payments this year compared with 2008, Bloomberg data show.
Slashed Dividends
Banks including Bank of America Corp. of Charlotte, North Carolina, and Citigroup Inc. slashed dividends amid the deepest recession since the 1930s. New York-based Citigroup, which paid 32 cents a share, discontinued its dividend this year. Bank of America reduced its quarterly payment to 1 cent a share from as much as 64 cents last year.
“The biggest payers out there were the financials,” Shacknofsky said. “So in dollar terms, dividends are still weak.”
Companies are also beginning to use cash from rebounding profits to buy back stock. Chubb Corp., the insurer of commercial property and high-end homes, approved a repurchase program this week of 25 million shares.
General Dynamics Corp., the producer of Abrams battle tanks and Gulfstream business jets, this week announced plans to buy back as many as 10 million shares. The Falls Church, Virginia- based company is forecast by Bloomberg to raise its dividend in March by 2 cents to 40 cents a share. Spokesman Rob Doolittle declined to comment.
Shacknofsky said companies should be raising dividends instead of buying back shares. “They should leave playing the market to investors, and they should rather give cash back as dividends,” he said.
‘Higher Yield’
Select companies such as Coca-Cola Co. and Walmart have held up well during the recession and maintained dividend increases, Crawford said. Those companies are a safe haven during this period of low interest rates and slow recovery.
“That’s why AT&T and Progress and some of these names are attractive,” Crawford said. “You are just as safe and you’re better off because you have higher yield.”
The Bloomberg dividend data is based on seven criteria including a company’s guidance, dividend history, regression analysis, and put-call parity. It had an accuracy rate of 87 percent for dividend forecasts for the U.S., Europe and Asia in the third quarter, compared with 61 percent for market analysts.
To contact the reporter on this story: Thomas Black in Monterrey at tblack@bloomberg.net.
Last Updated: December 4, 2009 10:18 EST
Bank of America Securities Sale Raises $19.3 Billion (Update3)
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By Michael Tsang and David Mildenberg
Dec. 4 (Bloomberg) -- Bank of America Corp., the largest U.S. lender, raised $19.3 billion selling securities at $15 apiece in the biggest sale of stock or preferred shares by a U.S. public company since at least 2000.
The bank, which plans to repay $45 billion of U.S. rescue funds, sold 1.286 billion so-called common equivalent securities, according to Bloomberg data. The security is made up of one depositary share and one warrant and is convertible into one common share, subject to stockholder approval, according to a regulatory filing by the Charlotte, North Carolina-based bank.
Bank of America plans to use the proceeds to free itself from government restrictions after accepting funds from the Troubled Asset Relief Program. Banks, brokerages and insurers have raised $1.5 trillion to shore up capital after the biggest financial crisis since the Great Depression spurred more than $1.7 trillion in writedowns and credit losses globally.
“We bought it in the market, we bought it in the deal and we’re probably going to buy more today,” said Michael Price, president of MFP Investors LLC in New York and manager of some of the best-performing mutual funds of the 1980s and 1990s. “When banks are being refinanced and they’re replenishing their old balance sheets with new capital, it’s very attractive.”
In May, Bank of America raised $13.5 billion issuing 1.25 billion common shares at $10.77 each in response to government stress tests and to help cushion losses tied to the takeover of Merrill Lynch & Co. The tests gauged the ability of banks to absorb losses in an extended recession, prompting Bank of America to boost capital by almost $40 billion.
Succession Battle
The repayment may ease efforts to replace Chief Executive Officer Kenneth D. Lewis, who’s leaving the bank Dec. 31. His successor inherits a company ranked first by assets and deposits in the U.S. The plan saves billions of dollars in TARP dividends and ends extra U.S. oversight of operations and salaries, Wells Fargo Advisors analyst Matthew Burnell wrote.
“Repaying TARP is going to allow a lot more flexibility for the incoming CEO as he handpicks his individual management team,” said Todd Hagerman, an analyst in New York with Collins Stewart Plc, who has a “buy” rating on Bank of America.
Bank of America fell to $15.63 at 9 a.m. in early New York trading, down from its $15.76 close yesterday. Michael Mayo of Calyon Securities USA Inc. raised his rating to “outperform” from “underperform” and boosted his target to $19 from $12, which had been the lowest among analysts surveyed by Bloomberg.
Citigroup Left
The bank plans to repay the U.S. using $26.2 billion of cash and the proceeds from the share sale, according to a statement. It expects to increase equity by $4 billion through asset sales and will issue $1.7 billion of restricted stock instead of year-end bonuses to some employees.
Bank of America Corp.’s plan to repay $45 billion of bailout funds would leave Citigroup Inc. as the only large bank subject to compensation reviews by Treasury paymaster Kenneth Feinberg.
Wells Fargo & Co., based in San Francisco, raised $8.6 billion in May in a secondary offering, while Goldman Sachs Group Inc. sold $5.75 billion in shares in April. Wells Fargo accepted $25 billion in TARP funds last year. Goldman has repaid $10 billion received through the program.
The Treasury’s refusal to sell its 34 percent stake in Citigroup is hampering the bank’s plans to repay $20 billion of remaining bailout funds, people familiar with the bank said. Executives at the New York-based lender are growing frustrated because they can’t sell stock to raise money for repayment until the Treasury signals when and how it will unload its 7.7 billion shares, said the people, declining to be identified because the matter is under discussion.
To contact the reporters on this story: Michael Tsang in New York at mtsang1@bloomberg.net; David Mildenberg in Charlotte at dmildenberg@bloomberg.net
Last Updated: December 4, 2009 09:01 EST
Michael Price Buys Bank of America in Equity Sale (Update2)
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By Lynn Thomasson and Deirdre Bolton
Dec. 4 (Bloomberg) -- Billionaire investor Michael Price said he bought shares of Bank of America Corp. in its $19.3 billion equity sale yesterday after shunning large lenders.
Bank of America raised money in the biggest U.S. offering of stock or preferred shares since at least 2000 to free itself from government restrictions after accepting funds from the Troubled Asset Relief Program. The Charlotte, North Carolina- based company, the largest U.S. bank, sold securities at $15 each, or 4.8 percent less than its closing price yesterday.
“It’s unusual we buy a deal like this,” Price said in a Bloomberg Television interview in New York, without disclosing how much stock he acquired. “We will probably buy more today.”
Price said Bank of America is the only large U.S. bank that he owns, though he holds smaller lenders including Regions Financial Corp. Bank of America’s price could climb above $20 if profit reaches $2 a share, he said.
The average per-share profit estimate of 25 analysts surveyed by Bloomberg is 96 cents for 2010 and $2.10 for 2011. Bank of America rose 27 cents to $16.03 at 10:18 a.m. in New York Stock Exchange composite trading.
Regions Financial, based in Birmingham, Alabama, climbed 2.4 percent to $5.63. Price’s MFP Investors LLC, based in New York, held 850,900 shares of the bank as of Sept. 30, according to data compiled by Bloomberg.
Price, 58, is known as a value investor who made his name buying shares of beaten-down lenders. Bank of America, whose stock fell 66 percent in 2008, plans to repay $45 billion in U.S. rescue funds. The stock is up 12 percent this year.
Regions, which accepted $3.5 billion in TARP funds, has declined 76 percent since the start of 2008.
View on GE
Franklin Resources Inc. bought Price’s former firm, Heine Securities Corp., in November 1996 for more than $600 million. During the 10 years before he sold, his four Mutual Series funds ranked in the top 10 percent of all mutual funds tracked by Lipper, the research division of Thomson Reuters Corp.
Price predicted that General Electric Co. will probably be a smaller, more profitable company in the future as it sells assets. Fairfield, Connecticut-based GE said yesterday it will sell a 51 percent stake in its NBC Universal entertainment unit to Comcast Corp. of Philadelphia, the largest U.S. cable- television operator.
“It’s probably a good opportunity, but I’m not there yet,” he said. “They have a big hole on the credit side.”
GE Chief Executive Officer Jeffrey Immelt said in a conference call yesterday with investors that he sees opportunities to acquire businesses as it invests capital from selling the NBC stake.
To contact the reporters on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net; Deirdre Bolton in New York at dbolton@bloomberg.net
Last Updated: December 4, 2009 10:21 EST
Canada Stocks Fluctuate as Gold Shares Fall, Oil Companies Gain
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By Matt Walcoff
Dec. 4 (Bloomberg) -- Canadian stocks swung between gains and losses, shirking a global rally, as the unexpected decline in the U.S. unemployment rate drove energy shares higher and sent gold producers to the steepest retreat since June.
EnCana Corp. and Canadian Oil Sands Trust advanced more than 2 percent as crude oil added 1.6 percent in New York following the U.S. Labor Department report showing the jobless rate fell to 10 percent in the world’s biggest economy. Bullion companies including Barrick Gold Corp. in the Standard & Poor’s/TSX Composite Index plunged 4.9 percent as the jobs report bolstered optimism about the global recovery.
The S&P/TSX lost 18.01 points, or 0.2 percent, to 11,618.54 at 10:31 a.m. in Toronto for the worst performance among benchmarks for developed markets that were open when the U.S. jobs report was released. The S&P 500 Index surged 1.3 percent.
Canada’s benchmark stock index gained 29 percent this year through yesterday as gold prices headed for a ninth consecutive annual advance. Commodity-linked companies make up 47 percent of the value of Canadian stocks, according to data compiled by Bloomberg.
Employers in the U.S. cut 11,000 jobs in November, the fewest since the steepest recession since the 1930s began. In Canada, employment rose by 79,100 -- five times more than the median forecast in a Bloomberg survey -- as the jobless rate fell to 8.5 percent from October’s 8.6 percent.
To contact the reporter on this story: Matt Walcoff in Toronto at mwalcoff1@bloomberg.net.
Last Updated: December 4, 2009 10:39 EST
Brazil Stocks Surge as Jobless Rate in U.S. Unexpectedly Falls
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By Paulo Winterstein
Dec. 4 (Bloomberg) -- Brazilian stocks surged, heading for a fifth straight weekly gain, after the U.S. lost fewer jobs than analysts estimated and the South American country’s biggest retailer said it would merge with a smaller rival.
Cia. Brasileira de Distribuicao Grupo Pao de Acucar, Brazil’s largest retailer, jumped 8.5 percent after it agreed to merge with Casas Bahia. Petroleo Brasileiro SA, the country’s state-controlled oil company, rose as the U.S. reported a lower- than-expected unemployment rate, sparking gains in crude prices. Gol Linhas Aereas Inteligentes SA, Brazil’s second-biggest airline, gained after airport traffic in Latin America expanded for a fourth consecutive month.
“Payrolls are improving and unemployment is falling, which indicates that the worst has passed and that you could have sustainable growth now,” said Jonatas de Castro, a trader at BI Invest in Sao Paulo. “This partnership between Pao de Acucar and Casas Bahia is very positive. Casas Bahia is focused on lower classes and Pao de Acucar has customers with a little more money, so this diversity in the retail sector is very important.”
The Bovespa index rose 1.3 percent to 69,173.11 at 9:36 a.m. New York time. The real gained 0.3 percent to 1.7060 per dollar. Chile’s Ipsa index climbed 0.9 percent and futures of Mexico’s Bolsa index jumped 1.5 percent.
Grupo Pao de Acucar gained 4.84 reais to 61.79 reais. The Sao Paulo-based retailer agreed to buy Casas Bahia in its second acquisition since June to strengthen its home appliance business.
Globex Utilidades
Sao Paulo-based Pao de Acucar and Casas Bahia will transfer their home appliance retail units to Globex Utilidades SA, the company said today in a regulatory filing. Pao de Acucar will own 50 percent plus one common shares of Globex. The value of the transaction was not disclosed in the statement.
Pao de Acucar will probably pay 6 billion reais to 7 billion reais ($4.1 billion) for the acquisition, SLW Corretora analyst Caue Pinheiro said before the announcement of the transaction.
Lojas Americanas SA, Brazil’s biggest discount retailer, fell 2 percent, while its online retailing unit, B2W Cia. Global do Varejo, slipped 5 percent.
Petrobras gained 1 percent to 39.70 reais. Crude oil rose for the first time in three days. Employers in the U.S. cut the fewest jobs in November since the recession, signaling the recovery is lifting the labor market out of the worst slump since World War II.
Payrolls fell by 11,000 workers, less than the 125,000 losses expected, according to the median estimate of economists surveyed by Bloomberg News. The jobless rate declined to 10 percent, figures from the Labor Department showed today in Washington.
Gol rose 3.1 percent to 25.73 reais. Bigger rival Tam SA rose 2.9 percent to 31.92 reais. Global passenger traffic at Latin America’s airports jumped 19 percent in October from the year earlier, the Airports Council International in Geneva said today.
To contact the reporter on this story: Paulo Winterstein in Sao Paulo at pwinterstein@bloomberg.net.
Last Updated: December 4, 2009 09:43 EST
Big Lots, Smith & Wesson, Sun, Take-Two: U.S. Equity Movers
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By Nikolaj Gammeltoft
Dec. 4 (Bloomberg) -- Shares of the following companies are having unusual moves in U.S. trading. Stock symbols are in parentheses, and prices are as of 9:35 a.m. in New York.
Bank of America Corp. (BAC US) added 0.4 percent to $15.83. The largest U.S. lender raised $19.3 billion selling securities at $15 each in the biggest sale of stock or preferred shares by a U.S. public company since at least 2000.
Big Lots Inc. (BIG US) jumped 15 percent to $27. The broadline closeout retailer reported profit excluding some items of 27 cents a share in the third quarter, beating the average analyst estimate of 44 percent, according to Bloomberg data.
Marvell Technology Group Ltd. (MRVL US) added 8.2 percent to $17.88. The maker of chips for computers and mobile phones reported earnings excluding some items of 35 cents a share for the third quarter, 34 percent more than the average analyst estimate in a Bloomberg survey.
Regency Centers Corp. (REG US) dropped lost 3.2 percent to $31.91. The Jacksonville, Florida-based real estate investment trust said it plans to sell 8 million shares. More stock may dilute the value of existing shares.
Smith & Wesson Holding Corp. (SWHC US) dropped 15 percent to $4.47. The gun maker forecast third-quarter sales of $95 million at most, trailing the average analyst estimate of $104.5 million, according to Bloomberg data.
Sun Microsystems Inc. (JAVA US) jumped 5.1 percent to $8.65. Oracle Corp. (ORCL US) wants to reconcile European Union antitrust regulators to his company’s planned $7 billion purchase of Sun Microsystems by creating a separate entity for Sun’s MySQL open database software business, the New York Post reported, citing two unidentified people.
Take-Two Interactive Software Inc. (TTWO US) plunged 33 percent to $7.32. The maker of the “Grand Theft Auto” video games forecast a loss of at least 40 cents a share in the fiscal first quarter. That’s wider than the average 26-cent loss estimated by analysts in a Bloomberg survey.
Western Gas Partners LP (WES US) dropped 4.6 percent to $18.10. The natural-gas pipeline owner and processor sold 6 million common units at $18.20 each. More units may dilute the value of existing equity.
To contact the reporter on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net
Last Updated: December 4, 2009 09:35 EST
Stocks, Dollar Rally as Gold, Treasuries Drop on Jobs Data
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By Mary Childs
Dec. 4 (Bloomberg) -- Stocks rallied, while Treasuries slid and gold was poised for the biggest decline since July, as an unexpected decrease in the U.S. unemployment rate bolstered optimism that the world’s largest economy is strengthening. The U.S. Dollar Index gained the most in 10 weeks.
The Standard & Poor’s 500 Index jumped 1.4 percent to a 14- month closing-basis high of 1,115.81 at 10:49 a.m. in New York after the Labor Department said the U.S. lost the fewest jobs last month since the recession began. The MSCI Emerging Markets Index rose for a fifth straight day, its longest streak in almost a month.
Two-year Treasuries fell the most since August, sending yields up 11 basis points to 0.83 percent. Gold futures for February delivery slid 2.1 percent to $1,192.40 an ounce as the Dollar Index, which gauges the currency against six major counterparts, rallied more than 1 percent.
“We’re going to be popping bubblies,” said Burt White, chief investment officer at LPL Financial in Boston, which oversees $269 billion. “It’s great news and this has a huge impact on consumption and consumer spending and all the other aspects that can really continue to fuel growth here.”
The S&P 500 extended its weekly gain to 2.1 percent after the Labor Department said the nation lost 11,000 jobs in November, compared with the median economist estimate for a decrease of 125,000. The unemployment rate fell to 10 percent, signaling the recovery is lifting the labor market from the worst slump since World War II.
U.S. stocks fell yesterday as concern grew that job losses would top economists’ estimates. A private report on payrolls suggested the unemployment rate “might tick upward,” White House press secretary Robert Gibbs said yesterday.
‘Enjoy It for Today’
“Bottom line, the data is a clear positive but doesn’t square with other info,” said Peter Boockvar, equity strategist at Miller Tabak & Co. in New York, in a note to clients. “But let’s enjoy it for today.”
Gold futures for February delivery fell for the first time this week, heading for the biggest drop for a most-active contract since July 8.
The dollar rose against 12 of the 16 most-traded currencies. It strengthened 1.7 percent versus the yen for a fourth day of gains, the longest stretch since October. The Dollar Index jumped 1 percent to 75.389.
The Canadian dollar rose against all of its major counterparts except the Mexican peso as the nation’s employers added more positions than expected. The yen was headed for its first weekly decline versus the dollar since October.
Fed Rate Bets
The dollar rallied as the jobs report spurred traders to increase bets that the Federal Reserve next year will boost its benchmark interest rate from a record low range near zero. Odds of an increase by the Fed’s June meeting grew to 55 percent from 43 percent yesterday, according to Fed funds futures trading.
Treasuries slid as the jobs report reduced demand for the relative safety of government debt. The 10-year yield jumped 11 basis points, or 0.11 percentage point, to 3.5 percent
The cost to protect against defaults on U.S. corporate bonds fell. The Markit CDX North America Investment-Grade Index declined 2.5 basis points to 99 basis points as of 8:39 a.m. in New York, according to broker Phoenix Partners Group. A decrease in the index signals improvement in investor confidence.
Asian markets closed before the U.S. jobs report. The MSCI Asia Pacific Index slipped from a 15-month high as yesterday’s unexpected contraction in U.S. service industries sparked concern about the strength of the global economic recovery.
Japan’s Topix index added 0.2 percent today to cap a 9.7 percent advance over the past five days, its best week since August 1992. The rally came as the yen weakened on speculation the Bank of Japan would take measures to limit the currency’s appreciation. The central bank announced a 10 trillion-yen ($113 billion) credit program on Dec. 1 amid government calls for it to combat falling prices.
To contact the reporter on this story: Mary Childs in New York at mchilds4@bloomberg.net.
Last Updated: December 4, 2009 10:52 EST
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