Gold’s ‘Perfect Storm’ to Continue on Haven Demand, Morgan Stanley Says

By Glenys Sim - Sep 13, 2011 11:23 AM GMT+0700

Gold’s “perfect storm” is expected to continue on renewed investor demand for haven assets, potentially driving the metal to its 1980 inflation- adjusted record, according to Morgan Stanley.

The firm retains a positive view on gold for its role as portfolio insurance against a “formidable cocktail” of macro challenges including financial systemic risk, concern of a double dip recession and sustained low interest rates, its analysts including Peter Richardson wrote in a report.

The outlook for gold is now in favor of the firm’s “bull case” target of $1,625 an ounce this year and $1,819 an ounce in 2012, they said. Bullion now has an estimated 85 percent probability of trading between $1,819 an ounce and $2,085 an ounce next year, according to Morgan Stanley’s calculations.

“As the source of downside risk to growth is the result of policy error in relation to the handling of sovereign debt in which the outcome is likely to be an extended period of negative real interest rates in the developed world, the forecast risk in gold is skewed firmly to upside,” the analysts wrote.

The firm’s “base case” calls for gold to average $1,511 an ounce this year and $1,624 an ounce in 2012. Immediate- delivery gold, which reached a record $1,921.15 an ounce on Sept. 6, has averaged $1,523 this year. It traded at $1,832.57 an ounce at 12:19 p.m. Singapore time.

Gold is still below its nominal high after accounting for inflation. Spot gold’s $850 an ounce peak in January 1980 is equivalent to $2,330.51 today after adjusting for inflation, according to the U.S. Labor Department’s inflation calculator.

Bull Market

Bullion is in the 11th year of a bull market, the longest winning streak since at least 1920 in London, as investors seek to diversify away from equities and some currencies, as well as hedge against inflation. The metal is up 29 percent this year, outperforming global stocks, commodities and Treasuries.

“We would expect a meaningful challenge to the previous inflation adjusted all-time high gold price” on increased risks from the contagion effects of the debt crisis in Europe, continued uncertainty over U.S. debt and the likelihood of extended low rates in response to weakness in the U.S. economy, the analysts said.

The Federal Reserve pledged to keep its benchmark interest rate at a record low at least through mid-2013 to revive a recovery that’s “considerably slower” than anticipated. The Federal Open Market Committee is “prepared to employ” additional tools to bolster an economy hobbled by weak hiring and anemic household spending, it said Aug. 9.

Gold is also benefiting from the changing foreign exchange environment, according to Morgan Stanley, as low rates in the U.S. will provide little support for the dollar. Bullion, priced in dollars, typically moves inversely to the U.S. currency.

To contact the reporter on this story: Glenys Sim in Singapore at gsim4@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

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Oil Rises a Second Day in New York on Forecast of Shrinking Inventories

By Grant Smith - Sep 13, 2011 7:53 PM GMT+0700

Oil rose for a second day in New York before data forecast to show that crude supplies declined a second week in the U.S., the largest consumer of the commodity.

The U.S. Energy Department may say tomorrow U.S. crude supplies dropped by 3 million barrels last week as a result of storms in the Gulf of Mexico, according to a Bloomberg survey. Oil extended its advance in New York as the dollar reversed gains and U.S. stock index futures pared their declines. Brent pared earlier gains in London after the International Energy Agency, an adviser on energy policy to 28 nations, reduced its estimate of 2012 global oil demand by 400,000 barrels a day.

“This is a market that’s been tightening for the past 12 to 15 months,” David Fyfe, head of the IEA’s industry and markets division, said in a telephone interview from Paris. “This year the tightening has been more about supply outages than demand.”

Crude for October delivery advanced as much as $1.74, or 2 percent, to $89.93 a barrel in electronic trading on the New York Mercantile Exchange. The contract traded for $89.77 at 1:48 p.m. London time. Prices have risen 16 percent in the past year.

Brent oil for October settlement was up 39 cents at $112.64 a barrel on the London-based ICE Futures Europe Exchange after gaining as much as $1, or 0.9 percent, to $113.25 a barrel. Yesterday Brent fell to $110.42, the lowest since Sept. 6.

Brent Backwardation

The European benchmark contract closed at a premium of $24.06 to U.S. futures yesterday, the smallest since Aug. 23 and down from a record close of $26.87 on Sept. 6. The spread is at $22.87 a barrel today.

The October Brent contract was at a premium of $2.25 a barrel to the November future, the most since June 15. This market structure, where prompt supplies are more expensive than later deliveries, is known as backwardation and signals demand for near-term supplies is greater than for future shipments.

German Chancellor Angela Merkel said that Greece is taking the right steps to get its next bailout payment, warning against allowing a Greek default because of the risk of contagion for other euro-area countries.

The Paris-based IEA said that demand worldwide will rise by 1.2 percent to 89.3 million barrels a day this year, and by 1.6 percent to 90.7 million in 2012. The full resumption of exports from Libya will be “long and difficult,” it said.

The Energy Department report may show U.S. crude inventories slid 3 million barrels last week, according to the median of 10 analyst estimates in a Bloomberg News survey. Gasoline supplies probably fell 500,000 barrels, the survey shows. The industry-funded American Petroleum Institute will report its own data today.

Output in the Gulf of Mexico, which accounts for 27 percent of U.S. supply, was cut 61 percent last week after Tropical Storm Lee shut production platforms.

To contact the reporters on this story: Ann Koh in Singapore at akoh15@bloomberg.net; Grant Smith in London at gsmith52@bloomberg.net

To contact the editor responsible for this story: Stephen Voss on sev@bloomberg.net

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Obama May Limit Tax Breaks on Muni Bonds

By Steven Sloan, William Selway and Richard Rubin - Sep 13, 2011 10:44 PM GMT+0700

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President Barack Obama holds up a copy of the American Jobs Act with Vice President Joseph Biden surrounded by teachers, police officers, construction workers and small business owners in the Rose Garden of the White House on Sept. 12, 2011. Photographer: Andrew Harrer/Bloomberg

President Barack Obama proposed curbing the amount of interest from municipal bonds that top earners can exclude from their taxable income, a step that may diminish demand for state and local-government securities.

The president’s $447 billion job-creation plan would pare the tax break for municipal-bond interest to 28 percent for couples earning more than $250,000 a year. Such tax-exempt interest is currently worth 35 percent for earners in the top tax bracket because that’s the amount they would otherwise have to pay on their income.

Any move to limit the tax advantage for municipal securities would face resistance from local-government officials because the break bolsters demand for their debt, lowering the interest rates they pay when borrowing for public works. Investors in the $2.9 trillion market for municipal bonds are willing to accept lower returns because the income isn’t taxed.

“We’re very much opposed” to limiting the tax exemption, said Mike Nicholas, chief executive of the Bond Dealers of America, a Washington-based lobbying group for banks that underwrite municipal bonds. “You’re going to end up punishing state and local governments.”

Fiscal Strains

States, cities and counties have yet to fully recover from the strains of the 18-month recession that ended in June 2009. States faced budget deficits of about $89 billion this fiscal year, according to the National Conference of State Legislatures. State and local governments combined have cut 680,000 jobs since 2008, according to Labor Department statistics.

The tax break has faced challenges in Congress amid a push to rein in the federal deficit, though no proposals have advanced. The president’s deficit-reduction commission recommended scrapping it last year as part of an overhaul of the U.S. tax code, while Senator Ron Wyden, a Democrat from Oregon, proposed replacing the tax exemption with a credit.

The proposal had limited impact on trading in municipal securities today. Top-rated municipal debt maturing in 10 years yielded about 2.05 percent, almost unchanged from yesterday, according to BVAL pricing data.

Obstacles Ahead

Scott Eldridge, director of portfolio management for Caprin Asset Management in Richmond, Virginia, said he’s seen no signs of investors selling bonds on the proposed change, which he expects would face political obstacles given the cost it would impose on state and local governments.

“We haven’t seen anything to suggest that the market is reacting to this now,” said Eldridge, whose company holds about $800 million of municipal bonds.

Republicans gave the president’s jobs plan a tepid reaction. Michael Steel, a spokesman for House Speaker John Boehner, an Ohio Republican, criticized the proposal, which also seeks to roll back breaks for private-equity fund managers and oil companies, as a tax on businesses.

While previous efforts to repeal the exemption have faltered, there’s concern that it may be drawn into efforts to curb the federal deficit, said Lars Etzkorn, a lobbyist for the National League of Cities.

“We’re concerned that some budget-control exercise could get out of control,” he said.

Limited Scope

The president’s proposal is narrower and would only limit the benefits, not revoke them entirely, for those in the top tax brackets. It is part of a group of tax breaks targeted to pay for a plan designed to stimulate the economy in part by giving states aid to keep teachers and emergency-worker jobs.

The proposed change, which was included on page 136 of the 155-page bill, wasn’t trumpeted by the administration. The measure would take effect at the start of 2013, according to a summary from the administration.

The Government Finance Officers Association, which represents public borrowers, said it was concerned about any move to limit the tax exemption for municipal securities.

“Limiting the amount of tax-exempt interest that can be deducted would likely affect demand and therefore increase debt- issuance costs for all governments who need to access the bond market,” said Susan Gaffney, a Washington lobbyist for the group.

The plan would limit the value of the tax break to the benefit it affords to earners in the 28 percent bracket. The exemption effectively provides a 35 percent tax break for top earners because that’s what they pay on other income. For couples earning less than $250,000, or individuals below $200,000 for single taxpayers, there would be no change, said Meg Reilly, a spokeswoman for the White House Office of Management and Budget.

Local governments will probably rally to oppose the measure, said Michael Schroeder, president and chief investment officer of Wasmer, Schroeder & Co., which manages about $3 billion of municipal bonds in Naples, Florida.

“There’s a healthy skepticism about it passing in its current form,” he said. “As written it’s dead on arrival.”

To contact the reporters on this story: Steven Sloan in Washington at ssloan7@bloomberg.net; William Selway in Washington at wselway@bloomberg.net

To contact the editors responsible for this story: Mark Silva at msilva34@bloomberg.net; Mark Tannenbaum at mtannen@bloomberg.net

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Greece Has 98% Chance of Default on Euro-Region Sovereign Woes

By Abigail Moses - Sep 13, 2011 8:06 PM GMT+0700

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George Papandreou, Greece's prime minister. Photographer: Kostas Tsironis/Bloomberg

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Sept. 13 (Bloomberg) -- Lutz Karpowitz, a senior currency strategist at Commerzbank AG, discusses Greece's debt crisis and the outlook for the euro. He speaks from Frankfurt with Mark Barton on Bloomberg Television's "Countdown." (Source: Bloomberg)

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Sept. 13 (Bloomberg) -- Shen Jianguang, chief economist for greater China at Mizuho Securities Asia Ltd., talks about the potential role of China as an emergency lender to Italy amid the European debt crisis. Shen speaks with Deirdre Bolton on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

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Sept. 12 (Bloomberg) -- David Blanchflower, a professor at Dartmouth College and Bloomberg Television contributing editor, talks about the European debt crisis and euro. He speaks with Erik Schatzker on Bloomberg Television's InsideTrack." (Source: Bloomberg)

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Sept. 13 (Bloomberg) -- Philip Tyson, head of interest-rate strategy at MF Global UK Ltd., discusses the European Central Bank's debt purchases and Greek and Italian bond yields. He talks with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)

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Sept. 13 (Bloomberg) -- Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd., discusses the impact of the European sovereign debt crisis on the U.S. Shepherdson speaks with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

Greece has a 98 percent chance of defaulting on its debt in the next five years as Prime Minister George Papandreou fails to reassure investors his country can survive the euro-region crisis.

“Everyone’s pricing in a pretty near-term default and I think it’ll be a hard event,” said Peter Tchir, founder of hedge fund TF Market Advisors in New York. “Clearly this austerity plan is not working.”

It costs a record $5.8 million upfront and $100,000 annually to insure $10 million of Greece’s debt for five years using credit-default swaps, up from $5.5 million in advance on Sept. 9, according to CMA. Greek bonds plunged, sending the 10- year yield to 25 percent for the first time.

German Chancellor Angela Merkel said she won’t let Greece go into “uncontrolled insolvency” as politicians try to limit contagion to other euro members. Papandreou’s pledge to adhere to deficit targets that are conditions of the European Union and International Monetary Fund’s bailout were undermined by data showing his country’s budget gap widened 22 percent in the first eight months of the year.

The default probability for Greece is based on a standard pricing model that assumes investors would recover 40 percent of the bonds’ face value if the nation fails to meet its obligations. CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated credit- swaps market, lowered its recovery assumption to 38 percent late yesterday, which would give Greece a 95 percent chance of default.

Economy to Shrink

Greece’s government now expects the economy to shrink more than 5 percent this year, more than the 3.8 percent forecast by the European Commission, as austerity measures deepen a three- year recession. Papandreou approved a plan to help repair the budget deficit at the weekend amid swelling resistance from Greeks.

Greece’s 10-year bond yield rose 111 basis points, or 1.11 percentage points, to 24.65 percent as of 1:55 p.m. in London, after earlier climbing to a euro-era record of 25 percent. The two-year note yield increased 662 basis points to 76.17 percent, after rising to an all-time high.

Greek stocks fell, with the ASE Index tumbling as much as 1.2 percent to the lowest since 1995 and down more than a third from July 22.

The risk of contagion beyond Greece weakened the euro and boosted benchmark German bunds. The common currency fell toward its weakest level since 2001 against its Japanese counterpart, declining 0.6 percent to 104.99 yen.

Sovereign Record

An index measuring the cost of default protection on 15 European governments to a record. European bank debt risk also jumped to the highest ever amid speculation French lenders will be downgraded because of their holdings of Greek bonds.

The Markit iTraxx SovX Western Europe Index of credit- default swaps climbed one basis points to 354, an all-time high based on closing prices. The Markit iTraxx Financial Index linked to the senior debt of 25 banks and insurers increased two basis points to 316, while a gauge of subordinated debt risk was up seven basis points at 557, according to JPMorgan Chase & Co.

“The contagion impact of a default will be severe, because next in the firing line will be Italy, Spain and it will take in the whole of the European banking sector too,” Suki Mann, a strategist at Societe Generale SA in London, wrote in a note yesterday. “This trio are already under intense pressure, but it will get much worse.”

Euro-Region Nations

Credit-default swaps on Portugal, Italy and France rose to records, according to CMA. Portugal jumped nine basis points to 1,224, Italy rose four basis points to 510 and France was up 7.5 basis points at 196.5.

Germany’s government is debating how to support its nation’s banks should Greece fail to meet the budget-cutting terms of its rescue package, three coalition officials said Sept. 9. Merkel said in an interview with Berlin-based Inforadio that avoiding an “uncontrolled insolvency” was her “top priority” and that the region’s most indebted country is taking the right steps to getting its next bailout payment.

Credit-default swaps on BNP Paribas SA, Societe Generale SA and Credit Agricole SA, France’s largest banks, surged to all- time highs on bets they’ll have their ratings cut by Moody’s Investors Service this week.

French Banks

Swaps on SocGen were 14 basis points higher at 448.5, Credit Agricole increased 9.5 to 331.5 and BNP Paribas rose 16 basis points to 321, according to CMA.

Moody’s placed the three banks’ ratings on review in June to examine “the potential for inconsistency between the impact of a possible Greek default or restructuring and current rating levels,” the rating company said at the time. Downgrades are likely as the review period concludes, said people with knowledge of the matter, who declined to be identified because the information is confidential.

A basis point on a credit-default swap protecting 10 million euros ($13.6 million) of debt from default for five years is equivalent to 1,000 euros a year. An increase signals declining perceptions of credit quality.

Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

To contact the reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net

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Merkel Rejects Greek Default, Defends Euro-Area

By Tony Czuczka and Mariajose Vera - Sep 13, 2011 10:14 PM GMT+0700

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Chancellor Angela Merkel said, “Germany can’t be successful in the long run if Europe doesn’t do well at the same time.” Photographer: Jock Fistick/Bloomberg

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Sept. 13 (Bloomberg) -- Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd., discusses the impact of the European sovereign debt crisis on the U.S. Shepherdson speaks with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

German Chancellor Angela Merkel said Greece is taking the right steps to get its next bailout payment, warning against allowing a Greek default because of the risk of contagion for other euro-area countries.

Merkel, in a German radio interview broadcast today, said that an “uncontrolled insolvency” would further roil markets spooked by the prospect of a Greek default. The euro region currently has no system for “orderly” insolvency until the permanent rescue fund is established in 2013, she said.

“The top priority is to avoid an uncontrolled insolvency, because that wouldn’t just hit Greece and the danger that it hits everyone, or at least a number of other countries, is very big,” Merkel told Berlin-based broadcaster Inforadio. “I have made my position very clear: that everything must be done to keep the euro area together politically, because we would very quickly face a domino effect.”

Merkel’s comments are a rebuff to calls by members of her ruling coalition to consider allowing Greece’s insolvency and exit from the currency union as it struggles to satisfy the terms of its aid package. They also belie government plans to support German banks in the event that Greece goes into default.

The interview, posted on the website of the chancellor’s Christian Democratic Union party, is “typical Merkel,” Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co., said by telephone from Hamburg.

Interview ‘Tone’

“It does not completely rule out an orderly default, except that the entire tone of the interview very clearly suggests that her position is that she expects Greece to qualify for the next tranche,” he said. That she mentions the European Stability Mechanism allowing for orderly defaults from 2013 “suggests that she does not expect Greece to default now.”

Greece’s 10-year bond yield rose 109 basis points, or 1.09 percentage point, to 24.63 percent as of 5:08 p.m. in Berlin, after earlier climbing to a euro-era record of 25 percent.

The euro traded near its weakest level in a decade against the yen and fluctuated versus the dollar, declining less than 0.1 percent to $1.3676.

Greek Prime Minister George Papandreou will hold a conference call with Merkel and French President Nicolas Sarkozy tomorrow to discuss developments in Greece and the euro area, his office in Athens said.

Merkel, asked later at a press conference with Finnish Prime Minister Jyrki Katainen whether she saw Greece defaulting, called for the Greek government to be given time to reduce its debt and carry out the necessary economic reforms.

‘Yearning’ for Answers

“We all feel a yearning, that there might be one buzzword that solves the problem we have in the euro area, in other words the debt crisis, whether it’s euro bonds, insolvency or other words,” Merkel said. “That won’t happen. I’m deeply convinced of that. Rather, it will be a very long, step-by-step process.”

Philipp Roesler, the vice chancellor and economy minister who heads Merkel’s Free Democratic Party coalition partner, said in an op-ed published in Die Welt newspaper yesterday that there can be no “taboos” when considering action “to stabilize the euro in the short term,” including a Greek insolvency.

Germany’s best-selling Bild newspaper today cited his comments as a factor unsettling markets. Merkel slapped him down in her radio interview, saying that “everybody should weigh their words very carefully.”

“What we don’t need is unrest in the financial markets,” she said. “The uncertainties are big enough as it is.”

Finance Minister Wolfgang Schaeuble, a CDU member like Merkel, denied that Roesler was calling for Greece to be allowed to go into default.

‘Catastrophe’ Planning

“He didn’t put the plan on the table, he said you can’t rule anything out,” Schaeuble said in an interview with ZDF television late yesterday. “A government has to consider what should happen in case of a catastrophe.”

German coalition officials stepped up their criticism of Greece last week after a delegation from the European Commission, European Central Bank and International Monetary Fund suspended a report on progress made in Athens in meeting the terms of its rescue program. The delay threatened to derail the next payment to Greece due next month.

Merkel offered her backing for Papandreou’s government, saying that a team of officials from the three institutions is returning to Athens this week, which “suggests that Greece has taken care of a few things” to meet the bailout conditions.

“Everything I hear out of Greece is that the Greek government has hopefully seen the writing on the wall and is now doing the things that are on the agenda,” she told Inforadio.

Merkel’s “entire tone is that she is encouraging Greece to do what it takes and if Greece does what it takes, the next tranche will be paid,” said Schmieding.

While she leaves open a back door to possible Greek insolvency, “the escape clause is not the message,” he said. “The message is she will not expect an escape clause to be used.”

To contact the reporters on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net; Mariajose Vera at mvera1@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg

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Apple Dividend or Buyback Is ‘More Likely Than Ever,’ Morgan Stanley Says

By Adam Satariano - Sep 13, 2011 11:01 AM GMT+0700
Apple Inc. (AAPL), the world’s most valuable company, is “more likely than ever” to return money to shareholders in the form of a stock buyback or dividend, according to Morgan Stanley.

Apple is able to finance a $25 billion share repurchase program or a 2.4 percent dividend using its available cash, said Katy Huberty, an analyst for Morgan Stanley in New York. Apple has $76 billion in cash and investment holdings, equivalent to about $81 a share, which could be used to fund the effort.

“We believe Apple is more likely than ever to return cash to shareholders,” Huberty said in a note to clients.

Technology companies that pay a dividend or buy back shares rather than using the money for acquisitions generally outperform their peers on the stock market, Huberty said. Steve Jobs, then chief executive officer, said last October that the company was saving its money for “strategic opportunities.” He stepped down as CEO last month to become chairman. The company is now run by Tim Cook, former chief operating officer.

A multibillion acquisition is still a possibility, Huberty said. While a large deal would be risky, it could be worthwhile if it brings new subscription-based revenue for streaming content to its devices, she said.

Toni Sacconaghi, an analyst at Sanford C. Bernstein & Co. in New York, has called on Apple to return money to shareholders. In a letter to Jobs and Apple’s board last year, he called the company’s hoarding of cash “excessive.”

‘Powder Dry’

Last October, when Cupertino, California-based Apple had $51 billion in cash and long-term investments, Jobs said it was keeping its “powder dry” in case an opportunity comes along.

“We’ve demonstrated a really strong track record of being very disciplined with the use of our cash,” Jobs said on Oct. 18 during a conference call with financial analysts. “We don’t let it burn a hole in our pocket.”

Apple rose $2.46 to $379.94 yesterday in Nasdaq Stock Market trading. The shares had climbed 18 percent this year before today.

Between Jobs returning to the company in 1997 and his retirement as CEO last month, the stock climbed 9,000 percent. The 56-year-old, who has battled a rare form of cancer, had been on medical leave since January.

To contact the reporters on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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S&P 500 Forecasts Reduced by Wells Fargo, Barclays on Economic Uncertainty

By Inyoung Hwang - Sep 13, 2011 3:08 AM GMT+0700

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While the move to “overweight” on discretionary stocks may seem contrary to Wells Fargo’s shift to recommending defensive groups, the group won’t suffer as much as other industries in an economic slowdown. Photographer: Justin Sullivan/Getty Images

Wells Fargo & Co.’s Gina Martin Adams and Barclays Plc’s Barry Knapp cut their forecasts for the Standard & Poor’s 500 Index this year, citing economic uncertainty and a potential decline in earnings estimates.

Adams, the New York-based equity strategist at Wells Fargo, reduced her year-end price forecast for the S&P 500 by 10 percent to 1,250. Knapp, the head of U.S. equity strategy, lowered his to 1,325 from 1,450. Adams also cut her projection for combined profit by companies in the benchmark equity measure in 2011 and 2012.

The combination of Europe’s sovereign debt crisis and weakening U.S. economic data has pushed the S&P 500 down as much as 18 percent from its high this year in April. Strategists at Wall Street firms from UBS AG to Goldman Sachs Group Inc. have slashed their forecasts for the benchmark U.S. equity measure since the beginning of August. In the same period, analysts that cover stocks in the S&P 500 have lifted their profit estimates 0.4 percent to $99.88 a share.

“Micro profit forecasts are likely to play catch-up to soured macro data in coming weeks,” Adams and Peter Chung, an analyst at the firm, said in the note. “While bottom-up forecasters are holding relatively strong to their convictions for strong profits growth to continue, our models suggest earnings growth is likely to reflect the recent economic slowdown over the next few quarters.”

Weekly Losses

The S&P 500 rose 0.7 percent to 1,162.27 at 4 p.m. in New York. The index lost 1.7 percent last week, its sixth drop in the past seven weeks.

Combined earnings by companies in the equity measure will be $93.50 a share in 2011, down from an earlier estimate of $94.40, Adams said in a note dated today. She also lowered her estimate for profit in 2012 to $98.70 a share from $103.50. Knapp kept his predictions for profit by S&P 500 companies at $96 a share in 2011 and $105 in 2012.

“With roughly three quarters behind us, the risks to 2011 earnings are somewhat limited and we’re comfortable with our forecast,” Knapp wrote in a note dated Sept. 9. “However, 2012 is a different story.”

While Knapp still says S&P 500 profit will increase 9.4 percent in 2012 from the prior year, analysts’ expectations for growth have slowed. Financial companies are among the biggest risks to the Barclays earnings estimate for 2012, he said.

Public Policy

“We remain bullish,” he wrote. “Continued public policy uncertainty and the impact of slowing earnings momentum were significant factors in our decision to cut our 2011 year-end price target to a still optimistic 1,325.”

Technology, industrials, materials and consumer- discretionary stocks will lead the 15 percent rally from the S&P 500’s close on Sept. 9 to Barclays’s year-end forecast, Knapp said. Consumer staples and utility companies will lag behind, he said.

Adams said her profit forecasts for financials and energy companies diverged the most from the average estimate of company analysts. She raised her recommendation for consumer staples and consumer-discretionary stocks to “overweight” and utility stocks to “market weight.” She lowered her ratings for technology companies to “market weight,” while also downgrading industrial, energy and material companies to “underweight.”

Recommended Shift

“We are recommending a shift to a more defensive asset allocation,” Adams wrote. Declining commodity prices have allayed concerns that consumer companies will face margin pressures due to higher input costs, she said.

While the move to “overweight” on discretionary stocks may seem contrary to Wells Fargo’s shift to recommending defensive groups, the group won’t suffer as much as other industries in an economic slowdown, Adams said. Industrial and commodity companies would be vulnerable to a slowdown, according to San Francisco-based Wells Fargo.

“Energy, materials, and industrials nonetheless have among the most difficult earnings comparisons but highest expectations for growth over the next several quarters,” Adams wrote. “As the consensus works to catch up to the economic reality, we expect earnings downgrades are likely to weigh on these segments.”

To contact the reporter on this story: Inyoung Hwang in New York at ihwang7@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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Asian Stocks Rise, Rebounding From Year-Low

By Anna Kitanaka - Sep 13, 2011 1:18 PM GMT+0700

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Traders work at the Tokyo Stock Exchange in Tokyo. Photographer: Tomohiro Ohsumi/Bloomberg

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Sept. 13 (Bloomberg) -- Vasu Menon, vice president of wealth management at Oversea-Chinese Banking Corp., talks about China's economy and financial markets, gold prices, and the U.S. dollar. Menon, speaking with Rishaad Salamat on Bloomberg Television's "On the Move Asia," also discusses Federal Reserve monetary policy. (Source: Bloomberg)

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Sept. 13 (Bloomberg) -- Nader Naeimi, a Sydney-based strategist at AMP Capital Investors Ltd., talks about gold prices and global financial markets. Naeimi, speaking with John Dawson on Bloomberg Television's "Asia Edge," also discusses the European debt crisis and Australia's business confidence. (Source: Bloomberg)

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Sept. 13 (Bloomberg) -- Jason Brady, a managing director at Thornburg Investment Management Inc. in Santa Fe, New Mexico, talks about U.S. Treasuries and investment strategy. Brady, speaking with John Dawson on Bloomberg Television's "First Up," also discusses the possibility that China may invest in Italy. (Source: Bloomberg)

Asian stocks rose, with the benchmark regional index rebounding from a one-year low, as raw material and energy producers advanced on increased oil and copper prices.

BHP Billiton Ltd. (BHP), the world’s No. 1 mining company, advanced 2.6 percent in Sydney, leading raw material producers higher, after the prices of oil and copper rose. Inpex Corp. (1605), an energy explorer, advanced 1.6 percent in Tokyo. Fanuc Corp., a maker of industrial robots, advanced 2.3 percent after plunging 15 percent last week. Nintendo Co., the world’s largest maker of game players, slumped 5.5 percent on speculation it may sell fewer 3-D handheld players than it is targeting.

The MSCI Asia Pacific Index rose 0.5 percent to 118.55 at 3:15 p.m. in Tokyo after falling 0.1 percent. Nine stocks gained for every four that fell on the gauge, which dropped 3.3 percent in the previous two days, sending the measure to its lowest level since Aug. 2010 yesterday.

“Stocks are rebounding because they fell so sharply recently, but there’s nothing fundamentally good out there,” said Koichi Kurose, chief strategist in Tokyo at Resona Bank Ltd. “The global economy is still a concern. Even though stocks fell a lot recently, they may fall further if Greece goes into a default and the financial system loses out.”

The Asia-Pacific measure slumped 8.6 percent last month, the most since May 2010, amid concern global economic growth is slowing as Europe’s sovereign-debt crisis spreads and after Standard & Poor’s cut the U.S. credit rating.

Japan’s Nikkei 225 Stock Average gained 1 percent. Taiwan’s Taiex Index slumped 2.9 percent after being closed for a holiday in the past two days. China’s Shanghai Composite Index, which was also closed for trading yesterday, lost 1.1 percent today.

Australian Business Confidence

Australia’s S&P/ASX 200 Index advanced 0.9 percent, even after a National Australia Bank Ltd. survey of more than 500 companies from Aug. 24-30 that was released in Sydney today showed that business confidence in the nation plunged last month to its lowest level since April 2009.

Markets in South Korea and Hong Kong are closed today for a holiday.

Futures on the Standard & Poor’s 500 Index were little changed today. In New York, the index rebounded 0.7 percent yesterday, reversing losses in the last 90 minutes of trading, after the Financial Times reported that Italy aims to sell “significant” quantities of bonds and stakes in strategic companies to China.

An Italian government official, who declined to be identified, told Bloomberg News that Italian officials have held talks with Chinese counterparts about potential investment in the euro region’s third-largest economy. The purchase of Italian bonds by China was not the focus of the talks, which took place in the past few weeks, the official said.

Oil, Copper Rises

“Realistically most investors would consider that funding from China, while helpful, will have a limited impact on the core risks, and consequently the very small lift in markets today is most likely a very brief respite from a downwards trend,” said Angus Gluskie, who manages more than $300 million at White Funds Management in Sydney. “Investors remain concerned about the solvency of euro governments and financial institutions, and the ability of political parties in Europe and the U.S. to agree upon sensible strategies to both encourage employment and reduce indebtedness.”

Raw material producers and energy shares were among the biggest boosts to the MSCI Asia Pacific Index today.

BHP increased 2.6 percent to A$37.41, the largest support to the MSCI Asia Pacific Index. Origin Energy Ltd., an oil and gas explorer, rose 4.3 percent to A$13.05. Inpex advanced 1.6 percent to 490,500 yen.

Commodity Shares Rise

Crude oil for October delivery rose as much as 1.2 percent on the New York Mercantile Exchange today, its second day of gains, after stockpiles of crude in the U.S. shrank last week. Copper in London gained as much as 1.4 percent, rising for the first time in three days.

Stocks gained today after the MSCI Asia Pacific Index fell to a one-year low yesterday. Stocks on the MSCI Asia Pacific Index are trading at about 12 percent below the measure’s 200- day moving average.

The MSCI Asia Pacific Index declined 14 percent this year through yesterday, compared with a 7.6 percent drop by the S&P 500 and a 21 percent loss by the Stoxx Europe 600 Index. Stocks in the Asian benchmark are valued at 11.7 times estimated earnings on average, compared with 11.6 for the S&P 500 and 9.1 times for the Stoxx 600.

Fanuc, Komatsu Rebound

Fanuc, which plunged 15 percent last week and 3.4 percent yesterday, advanced 2.3 percent today and was the biggest support to the Nikkei 225. Komatsu Ltd., which makes construction machinery, also rallied 2.7 percent to 1,799 yen today, rebounding from a 14 percent decline last week.

Among other stocks that rose, Elpida Memory Inc. surged 13 percent to 557 yen after the Philadelphia Semiconductor Index, which tracks the performance of 30 industry stocks, yesterday rallied 3 percent to the highest since Aug. 15. Elpida posted the biggest gain on the MSCI Asia Pacific Index.

Dainippon Screen Manufacturing Co., a maker of chip- manufacturing equipment, jumped 4.8 percent to 462 yen. Advantest Corp., a maker of memory-chip testers, rose 4.8 percent to 896 yen.

Among stocks that fell, Nintendo sank 5.5 percent to 12,410 yen after analysts said the company will probably sell fewer 3-D handheld players than it’s targeting as price cuts and new accessories fail to make up for a lack of hit titles. The stock fell even after the company’s president, Satoru Iwata, said today it will ad new functions to the 3DS in November.

To contact the reporter on this story: Anna Kitanaka in Tokyo at akitanaka@bloomberg.net

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net

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Italy Seeks $10B as Contagion Slams Bond Demand

By Lorenzo Totaro and Anchalee Worrachate - Sep 13, 2011 6:01 AM GMT+0700

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Italy’s borrowing costs have dropped from a euro-era high since the European Central Bank began buying the nation’s debt on Aug. 8. Photographer: Alessandra Benedetti/Bloomberg

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Sept. 12 (Bloomberg) -- Mark Dow, portfolio manager at Pharo Management LLC, talks about the European sovereign debt crisis and the outlook for the euro area. Dow speaks with Carol Massar and Matt Miller on Bloomberg Television's "Street Smart." (Source: Bloomberg)

Italy is auctioning as much as 7 billion euros ($10 billion) of bonds one day after borrowing costs surged at a bill auction, as Greece’s slide toward default roils global markets.

The treasury is selling 4 billion euros of a new benchmark five-year bond today, after 10-year yields climbed to a five- week high of 5.571 percent. Investors charged Italy 4.153 percent yesterday in a one-year bill offering, up from 2.959 percent a month ago.

“It’s rather unfortunate that the Italian auction is taking place when the market is in a panic mode,” said Fabrizio Fiorini, the head of fixed income at Aletti Gestielle SGR SpA in Milan. “Borrowing costs are likely to remain at elevated levels. The rise in Italian yields is manifestation of a lack of market confidence in European leaders’ ability to tackle the problem.”

A debt of 1.9 trillion euros -- more than Spain, Greece, Ireland and Portugal combined -- leaves Italy vulnerable to any advance in borrowing costs as it refinances maturing debt. The sales, which also include as much as 3 billion euros of bonds due in 2018 and 2020, will help fund 14.5 billion euros of debt scheduled for repayment on Sept. 15.

Italian officials have held talks with Chinese counterparts about potential investments in the euro region’s third-largest economy, an Italian government official said late yesterday. The purchase of Italian bonds by China wasn't the focus of the talks, which took place in the past few weeks, the official said on condition of anonymity. A spokesman for Italian Finance Minister Giulio Tremonti declined to comment.

The Financial Times earlier reported that Italy aims to sell ``significant'' quantities of bonds and stakes in strategic companies to China.

Default Risk

Divisions among European leaders on aiding Greece and preventing Italy from being engulfed by the debt crisis is sapping demand for bonds in the region. In Greece, Prime Minister George Papandreou’s latest offer of increased austerity is failing to convince investors the country can meet its fiscal targets and avoid default.

The yield on Greece’s two-year note yesterday surged to almost 70 percent, while the cost of insuring Greek, French, Spanish and Italian debt against default all rose to records. The premium investors demand to hold Italian 10-year bonds rather than comparable German bunds rose to 383 basis points, nearing a euro-era record close of 389.5 set on Aug. 4.

European stocks slumped, dragged lower by a slide in shares of banks who are the biggest holders of Greek and Italian bonds. UniCredit SpA, Italy’s largest bank, fell 11 percent to 69 euro cents, the biggest decline and lowest close since March 2009. Intesa Sanpaolo SpA fell 9.5 percent to close at the lowest in more than 14 years.

Funding Needs

“The contagion impact of a default will be severe, because next in the firing line will be Italy, Spain, and it will take in the whole of the European banking sector too,” Suki Mann, a strategist at Societe Generale SA in London, wrote in a report.

While Italy has completed more than 70 percent of its debt financing this year, it still needs to sell about 70 billion euros of bonds by year-end to cover its budget deficit and other redemptions.

Italian yields are at their highest since the European Central Bank started buying Italian bonds on Aug. 8. To secure the ECB backstop, Prime Minister Silvio Berlusconi rushed through a 54 billion-euro austerity package that faces final approval from the lower house of parliament as soon as tomorrow.

Berlusconi’s allies began watering down the bill soon after it was first approved by the Cabinet on Aug. 12 and the backslide triggered an 11-day slump in Italian bonds that ended Sept. 6. One day before the Senate was set to vote on the plan, the government added a one-percentage point increase in the value added tax to compensate for a raft of measures that had been dropped from the original plan.

Premier's Plan

Berlusconi said yesterday that he had “performed a miracle” by delivering the deficit package just four days after the ECB called for the measures in exchange for buying the country’s bonds. Berlusconi travels to Brussels and Strasbourg today to defend the plan to EU Commission President Jose Manuel Barroso and EU President Herman Van Rompuy.

“The prospect of the budget approval, which should otherwise benefit Italy’s bonds, can’t offset the negative effect of the uncertainties over the outcome of the euro crisis,” said Chiara Cremonesi, a fixed-income strategist at UniCredit Research in London. “Today’s auction should go better than yesterday as the pressure on the spreads should ease.”

To contact the reporter on this story: Lorenzo Totaro in Rome at ltotaro@bloomberg.net. lmnyanda@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net

To contact the editor responsible for this story: Mark Gilbert at magilbert@bloomberg.net

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Stocks Advance, Oil Rises; Euro Weakens Against Yen Before Italy Bond Sale

By Shiyin Chen - Sep 13, 2011 2:07 PM GMT+0700

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A man holds euro notes in London. The euro weakened toward a 10-year low against the yen and gold halted a two-day decline amid speculation Greece is nearing default and before Italy sells bonds today. Photographer: Chris Ratcliffe/Bloomberg

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Sept. 13 (Bloomberg) -- Nader Naeimi, a Sydney-based strategist at AMP Capital Investors Ltd., talks about gold prices and global financial markets. Naeimi, speaking with John Dawson on Bloomberg Television's "Asia Edge," also discusses the European debt crisis and Australia's business confidence. (Source: Bloomberg)

Stocks snapped a three-day drop that drove the MSCI All-Country World Index to a one-year low, oil and copper climbed, while the euro slid toward its weakest level since 2001 against the yen before Italy sells bonds today.

The MSCI index of global equities added 0.5 percent at 4:02 p.m. in Tokyo, after yesterday falling to the lowest close since Sept. 1, 2010. Standard & Poor’s 500 Index futures lost 0.1 percent. Oil rallied 0.8 percent in New York, copper jumped 1 percent and gold rose 0.6 percent. The euro depreciated 0.5 percent to 105.07 yen and fell 0.3 percent to $1.3634. The cost of insuring Asia bonds against default halted a three-day gain.

Italy will seek to raise as much as 7 billion euros ($9.5 billion) selling bonds today, after a government official said yesterday the nation held talks with China about potential investments in the euro area’s third-largest economy. German Chancellor Angela Merkel said she won’t let Greece go into an “uncontrolled insolvency” because of the risk of contagion for other countries, according to an interview with Inforadio.

The prospect of China buying Italian bonds “is a move in the right direction,” said Nader Naeimi, a Sydney-based strategist at AMP Capital Investors Ltd., which manages almost $100 billion. “But I don’t think it will solve the deep root of the problem as the funding requirement of Italy is very large. You could slow the bleeding, but it won’t heal the wound,” he said in a Bloomberg Television interview.

Stocks Rebound

The Stoxx Europe 600 Index advanced 1.2 percent, rebounding from a two-day, 5 percent slump that sent the gauge to its lowest close since July 2009. Germany’s DAX Index rose 1.5 percent, France’s CAC 40 climbed 1.2 percent and the U.K.’s FTSE 100 Index increased 0.7 percent.

The MSCI Asia Pacific Index rose 0.4 percent after dropping 3.3 percent in the previous two days. Japan’s Nikkei 225 Stock Average added 1 percent and Australia’s S&P/ASX 200 Index rallied 0.9 percent. The Shanghai Composite Index fell 1 percent in China, where markets were closed for a holiday yesterday. South Korea and Hong Kong are shut today.

BHP Billiton Ltd., the world’s largest mining company, and Santos Ltd., Australia’s third-largest oil and gas producer, rose more than 2.3 percent each. HTC Corp. sank 4.9 percent after JPMorgan Chase & Co. lowered its rating on the smartphone maker to “neutral” from “overweight.” Nintendo Co. dropped 5.1 percent after analysts from brokerages including Macquarie Group Ltd. said the gamemaker may miss a sales target.

“Stocks are rebounding because they fell so sharply recently, but there’s nothing fundamentally good out there,” said Koichi Kurose, chief strategist in Tokyo at Resona Bank Ltd. “The global economy is still a concern. Even though stocks fell a lot recently, they may fall further if Greece goes into a default and the financial system loses out.”

Italy, China Talks

The S&P 500 reversed losses in the last 90 minutes of trading after the Financial Times reported that Italy’s government was in talks with China Investment Corp. about “significant” purchases of Italian bonds and investments in strategic companies. The U.S. stocks gauge closed 0.7 percent higher, after falling as much as 1.6 percent. Yields on 10-year Treasuries were little changed at 1.96 percent today after gaining three basis points yesterday.

“The idea that the Chinese may step up and buy Italian bonds puts to halt the idea of contagion,” Jim Bianco, Chicago- based president of Bianco Research LLC, said in a Bloomberg Television interview. “The big question is whether they actually follow through and buy Italian bonds.”

The purchase of Italian bonds by China was not the focus of the talks, which took place in the past few weeks, the government official who spoke on condition of anonymity told Bloomberg News. The Italian treasury is selling debt today to help pay for 14.5 billion euros of bonds maturing on Sept. 15.

Euro’s Weakness

The euro weakened against 14 of its 16 major peers. The shared currency yesterday reached $1.3495, the weakest since Feb. 16, and touched 103.90 yen yesterday, the lowest since June 2001.

The chance of a default by Greece in the next five years has soared to 98 percent as Prime Minister George Papandreou fails to convince investors that his country can survive the euro-region crisis, credit-default swaps showed.

China’s yuan forwards declined 0.5 percent to 6.3215, the biggest slide since May, according to data compiled by Bloomberg. Taiwan’s dollar weakened 0.8 percent to NT$29.464 versus its U.S. counterpart, a five-month low. The island’s financial markets were also closed yesterday for a holiday. Malaysia’s ringgit weakened for a seventh day.

The cost of protecting Asian corporate and sovereign bonds from default dropped, with the Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan falling 3.5 basis points to 176 basis points, Royal Bank of Scotland Group Plc prices show. The gauge has risen 21 basis points in the past three days of trading, according data provider CMA.

Gold, Oil

Gold for immediate delivery rose 0.6 percent to $1,826.63 an ounce, following a two-day, 2.9 percent drop. Bullion rose to an all-time high of $1,921.15 on Sept. 6. Cash silver jumped 1.5 percent to $40.8675 an ounce. Three-month copper added 1 percent to $8,840 a metric ton on the London Metal Exchange, also snapping two days of losses.

Oil for October delivery rose 0.8 percent to $88.90 a barrel on the New York Mercantile Exchange. An Energy Department report tomorrow may show crude inventories slid 3 million barrels last week, according to the median of 10 analyst estimates in a Bloomberg News survey. Gasoline supplies probably fell 500,000 barrels, the survey shows. The industry-funded American Petroleum Institute will report its own data today.

To contact the reporter on this story: Shiyin Chen in Singapore at schen37@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net

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Gold Rebounds as Two-Day Slump Lures Investors Amid Economic Uncertainty

By Glenys Sim - Sep 13, 2011 10:58 AM GMT+0700

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Sept. 13 (Bloomberg) -- Nader Naeimi, a Sydney-based strategist at AMP Capital Investors Ltd., talks about gold prices and global financial markets. Naeimi, speaking with John Dawson on Bloomberg Television's "Asia Edge," also discusses the European debt crisis and Australia's business confidence. (Source: Bloomberg)

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Sept. 13 (Bloomberg) -- Vasu Menon, vice president of wealth management at Oversea-Chinese Banking Corp., talks about China's economy and financial markets, gold prices, and the U.S. dollar. Menon, speaking with Rishaad Salamat on Bloomberg Television's "On the Move Asia," also discusses Federal Reserve monetary policy. (Source: Bloomberg)

Gold rebounded as a two-day slump made the precious metal attractive to investors looking to safeguard their wealth against financial turmoil and the risk of a deepening economic slowdown.

Gold for immediate delivery advanced as much as 1 percent to $1,832.75 an ounce and traded at $1,831.35 an ounce by 11:56 a.m. in Singapore. The metal, which reached a record $1,921.15 on Sept. 6, tumbled 2.9 percent in the past two days as investors sold the metal to cover losses in equities and the dollar touched a six-month high against a six-currency basket.

“The weakness in gold prices, we see it as an opportunity for investors to buy,” Vasu Menon, vice-president of wealth management at Oversea-Chinese Banking Corp., said in a Bloomberg Television interview. “Investment demand is on the rise, central banks are diversifying their reserves away from the U.S. dollar and we see a strong case for gold to head higher.”

December-delivery futures in New York also advanced, climbing as much as 1.3 percent to $1,837.20 an ounce before trading at $1,834.20. The metal snapped a two-day gain yesterday as concern about Europe’s debt crisis eased after a report that China may invest in Italy, helping the Standard & Poor’s 500 Index erase a 1.6 percent drop to end the day 0.7 percent higher.

The Financial Times reported that Italian officials are trying to convince China to purchase its bonds, without identifying its sources. An Italian government official, who declined to be identified, told Bloomberg News that Italian officials have held talks with Chinese counterparts about potential investments in the country.

Investment Demand

“If the U.S. dollar continues to strengthen because of what’s happening out of Europe, it could weigh on gold prices and gold could head below $1,800 an ounce,” said Menon. “On that kind of dip it presents an even more attractive buying opportunity because the long term prospects of gold are very promising.”

Gold is in the 11th year of a bull run, the longest rally since at least 1920 in London, as investors seek to diversify away from equities and some currencies, as well as hedge against inflation. The metal is up 29 percent this year, outperforming global stocks, commodities and Treasuries.

Central-bank and government-institution buying of bullion rose almost fivefold to 69.4 metric tons in the second quarter of this year, taking the first-half total to 192.3 tons, according to the World Gold Council. In 2010, central banks became net buyers for the first time in two decades and will remain net buyers this year, it said.

“While gold is exposed to a near-term consolidation after making fresh record highs recently, we recommend buying gold on dips as the ongoing debt/deficit crisis is likely to result in an extended period of super lax monetary conditions in the U.S. and Europe,” Societe Generale SA analysts led by Michael Haigh wrote in a report. “Gold is likely to make fresh all-time record highs before year-end.”

Cash silver gained as much as 1.7 percent to $40.9575 an ounce, also rebounding from a two-day drop, and traded at $40.8925. Spot platinum rose 0.7 percent to $1,818.95 an ounce, trading below gold for an eighth time on an intraday basis. Palladium gained 1.2 percent to $715.75 an ounce.

To contact the reporter on this story: Glenys Sim in Singapore at gsim4@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

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